ANNUAL GENERAL MEETING PORTUCEL – EMPRESA PRODUTORA DE PASTA E PAPEL, S.A. APRIL10th 2012
PROPOSAL RELATING TO ITEM TWO ON THE AGENDA
The Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A.
proposes
that the shareholders resolve on the management report, balance sheet and consolidated accounts for the financial year of 2011.
Setúbal, March 15th 2012
The Board of Directors
Portucel Empresa Produtora de Pasta e Papel, SA
Public Company
Registered under no. 503 025 798 at the Setúbal Companies Registry Share Capital: 767 500 000 euros N.I.P.C. 503 025 798
Report and Consolidated Accounts 2011
www.portucelsoporcel.com
Consolidated Annual Report 2011 1
Contents
Year in Review 2011 4 Message from the Chairman 7 Message from the Chief Executive Officer 9
1. The Portucel Group in 2011 11
Business Areas 11 Location of Production Plants, Commercial Subsidiaries, R&D Units and Nurseries 11 Economic and Financial Indicators 12 The Portucel Group 13 Analysis of Results 18 Financial Situation 20 Development 21 Risk Management 21
2. Capital Markets and Share Price Performance 24
Capital Markets 24
3. Market Performance 26
Economic Environment 26 Paper 28 Branding 29 Pulp 36 Logistics 37
4. Industrial Operations 38
Industrial Operations 38 Capital Expenditure 39
5. Resources and Supporting Functions 41
Sustainability 41 Forestry 44 Procurement 48
Consolidated Annual Report 2011 2
Environment 51 Energy 57 Human Resources 59 Social Responsibility 60 Innovation 63
6. Outlook 66
Acknowledgments 68 Declaration required under Article 245.1 c) of the Securities Code 69 Company Officers 70 Disclosures required under Articles 447 and 448 of the Companies Code and paragraphs 6 and 7 of Article 14 of Securities Market Commission Regulation 5/2008 (with regard to the financial year of 2011) 72
Consolidated Accounts and Notes to the Financial Statements 84
Statutory Auditors Report in respect of the Consolidated Financial Information 128 Report and Opinion of the Audit Board 130 Corporate Governance Report 132
Consolidated Annual Report 2011 3
Year in Review 2011
Business Performance
- Turnover grew by 7.4% to close to 1.5 billion euros, in a year dominated by the harsh economic climate;
- Group exports top 1.2 billion euros, with 95% of sales exported to 115 different countries;
- Net debt down by 230 millions euros, reflecting excellent capacity for generating cash flow;
- Net Debt/ EBITDA ratio improves from 1.6 to 1.1, reflecting a sound financial situation.
Development
- Progress made on the forestry project in Mozambique with continued fieldwork involving trials of more than 50 eucalyptus varieties;
- Work started on the project to expand the nurseries at the Espirra Estate, designed to increase annual production capacity to 12 million plants, equipping the Group with the largest and most up-to- date nursery for forest plants in Europe.
Paper Business/Branding
- Total paper sales up by 7% against the background of an economic slowdown;
- Solid growth in international sales, especially to the US, where the Group increased its market share by 30 thousand tons;
- Navigator was considered the second most valuable brand in Europe according to the Brand Equity Tracking Survey conducted by Opticom International Research.
Pulp Business
- Group output of BEKP (bleached eucalyptus kraft pulp) up by more than 5% over the previous year;
- New records set for pulp output at Group mills;
- Increased integration of pulp in paper production, since the start-up of the new Setúbal paper mill, leading to 3% reduction in pulp available for sale on the market.
Industrial Operations
- Output of printing and writing paper at Group units up by 7% over previous year;
Consolidated Annual Report 2011 4
- In its second full year of operation, the new Setúbal paper mill increased output by 18% over previous year;
- Projects launched to improve efficiency on various fronts at the Group’s production facilities, after a period of heavy investment in increasing paper production and power generation capacity;
- Significant gains achieved at Group plants, thanks to the implementation at all units of the LEAN project, designed to boost operational efficiency.
Forestry
- Group maintains its certifications obtained in previous years, under the two international woodlands certification schemes: FSC® and PEFC;
- In the field of forest certification, the Group was highlighted in 2011 as an international case study in “Celebrating Success: Stories of FSC® Certification”, launched at the 6th General Assembly of the Forest Stewardship Council®;
- Increased investment in defending forests against wildfires, totalling 3.2 million euros in 2011;
- Organization of the international conference “Plantations in Tomorrow’s Forests” to mark the International Year of Forests, attracting some four hundred participants and experts from Portugal and abroad.
Environmental Performance
- Positive indicators for environmental performance at all the Group’s production facilities and in all areas: air, water and natural resources.
- Reclamation of 83% of industrial waste produced at Group plants.
- Optimized processes and reduced consumption of fossil fuels allowed the Group to cut CO2 emissions per ton of output by approximately 7% in relation to 2010;
- Accrued retention of CO2 by the Group’s woodlands 13 times greater than the CO2 emissions licences awarded to the Group;
Energy
- Total power output corresponded to almost 4% of all electricity produced in Portugal;
- Group consolidated its position as Portugal’s leading producer of energy from biomass, accounting for around 52% of electricity generated from this resource;
- Power output from biomass plants up by 11.1% on the previous year;
Consolidated Annual Report 2011 5
Human Resources
- A firm commitment to ongoing training and professional development reflected in 129,122 staff training hours divided between 1,739 training initiatives;
- Campaign to encourage the use of the Employee’s Portal, offering a number of functions designed to optimise communication and reporting processes.
Social Responsibility
- Increased welfare support from the Group for the underprivileged members of its local communities, with the launch of the “Social Project” which involves donating essential foodstuffs for families facing economic hardship;
- Educational activities organized as part of the celebrations of World Forests Day, raising awareness amongst urban communities and primary school children of the need to protect woodlands and the environment;
- Open Doors 2001 Programme at the new Setúbal paper mill, designed to showcase the Portuguese paper industry and to strengthen links with local communities.
Innovation
- Development of 8 new products by the Portucel Group, consolidating its value proposition for the market;
- Launch of Pioneer Fresh Inspiration 75g/m2, a premium product with the signature “Do more with less”;
- Conclusion of the PADIS research programme into high performance printing papers conducted in partnership with organizations in the Portuguese science and technology sector, in order to expand our knowledge of the printability of uncoated papers.
Consolidated Annual Report 2011 6
Message from the Chairman
Shareholders,
The massive investment plan implemented by the Portucel group over recent years, and especially in the period from 2007 to 2010, has made it possible to take our business operations to a new level, to diversify our revenue sources and to focus on business areas where the Group’s competitive advantages can work to full effect.
In just a few years, we have repositioned ourselves as Europe’s leading manufacturer of uncoated woodfree (UWF) printing and writing paper. This has allowed us to increase our market shares in countries where we were already firmly established and to extend our sales network into new regions, which will undoubtedly be important markets in the future.
The rigour with which this investment plan was implemented, scrupulously adhering to both the budget and schedule, means that the Group emerged from this period with a balanced financial situation, consolidated year after year by successful results.
The economic crisis which in 2011 took a sharp turn for the worse in Portugal (and which, to a varying extent, has affected a large number of countries) has required us to be vigilant and alert so as to avoid any deterioration in Portucel’s ability to compete.
The Group has successfully addressed many of the difficulties which have severely affected a high proportion of companies, including some in our sector. These difficulties have led, principally in Europe and the United States, to reduced operation, or even closure, of a great many plants, especially in cases where long-term failure to invest in modernization has gradually undermined their competitiveness.
The Portucel group has followed a different course. We remain committed to an active quest for growth.
I personally believe that much more can be made of Portugal’s potential for forestry. But a lead needs to be taken to set this in motion, opening the way for new industrial ventures in the sector, with greater value added.
In the meantime, a renewable resource continues to be wasted, instead of making a much more
Consolidated Annual Report 2011 7
effective contribution to the growth of Portuguese exports.
Significant progress was made in late 2011 in the Group’s plans for international expansion, with the Mozambican government granting Portucel a second land-use license for the project it submitted to the authorities and has started to implement.
This has opened the way for speeding up the plans which will enable Mozambique to join the world’s leading producers of short fibre pulp.
Mozambique enjoys excellent natural conditions and has progressively consolidated its political, social and economic systems, whilst developing the logistical infrastructures needed for this project to be viable. At the same time, the country is well located in relation to the fastest growing markets, providing another factor which would make this project a powerful lever for the future development of the Portucel group.
In expressing my satisfaction as the excellent results achieved in such a difficult year, I wish to thank the shareholders for their unwavering confidence in the work of the directors and the Executive Board, and also to acknowledge the contribution made to the Group’s growth by our customers, suppliers, the financial institutions, our workforce and other stakeholders.
I also wish to express my conviction that, despite the very difficult times which still lie ahead for most of the developed economies, the Portucel group will continue to be a point of reference in Portugal’s industrial fabric, partly because of its own direct operations, and also because of its knock-on effect on thousands of small and medium-sized companies throughout the economy with which it engages on a regular basis.
Setúbal, January 30th 2012
Pedro Queiroz Pereira
Consolidated Annual Report 2011 8
Message from the Chief Executive Officer
Shareholders,
We can confidently say that, overall, the financial year of 2011 was extremely positive for the Portucel Group.
We set new records for exports and output of cellulose pulp and paper, whilst sales continued to grow, up over the year by 7.4%. Profitability indexes remained at high levels and the company strengthened its financial structure, sharply reducing its net debt.
The economic situation which continues to affect many of the countries where our main clients are located, both in Europe and the United States, whose economies have long been stagnant, and in some cases in recession, negatively impacted Portucel group business activities and, above all, its results.
Consumption of the tradable goods we produce and exports – bleached eucalyptus kraft pulp (BEKP) and uncoated woodfree (UWF) printing and writing paper – is closely tied to economic growth and, even more directly, to the size of the working population. Unemployment rates have remained at worryingly high levels, although in the USA they began to fall at the start of the second half of 2011. In Europe, however, the jobless figures have grown relentlessly worse.
This has caused demand for UWF paper to decline in markets which are important to the Portucel group, requiring us to extend our sales plan to more distant countries where we have previously not been established. This expansion of our sales area with the Group’s UWF paper being now sold to over 115 countries, has meant some reduction in our margins.
Operating results for the year were also hit by other rising costs, in particular for chemicals and timber, aggravated in the latter case by the need to import wood to offset the shortfall in output from Portugal’s own forests.
The Portucel group has continued to draw the authorities’ attention to the local costs faced by businesses operating in Portugal, that constitute a stumbling block to economic growth, innovation and to attracting capital projects. Forest-based industries, and the eucalyptus sector in particular, are of structural importance to the Portuguese economy, with Portucel standing out in terms of the extremely high level of national value added it incorporates in its products, and the sustainability of its business model.
Portucel group’s influence is felt throughout the Portuguese economy. The Group deals with some 400,000 forest landowners, whilst 84% of its inputs are produced in Portugal, purchased from more
Consolidated Annual Report 2011 9
than 5,500 companies located in the country. It accounts for 9% of all maritime and containerized export cargo handled at the country’s ports and represents 3% of Portugal’s visible exports.
The FAO’s Forest Products Annual Review for 2007/2008 identified Portugal as pioneer in the promotion of certified forest management, because of the cash premium offered to the market for certified wood. This was an incentive introduced by Portucel group in 2006, which has since engaged with forest landowners in a variety of ways to show them what can be done to improve the quality of their plantations and their forest management models, their plans for defence against wildfires and for preserving ecosystems and biodiversity.
It is essential to increase the industry’s already impressive contribution to the trade balance, in order to improve the returns obtained by the tens of thousands of individuals and businesses in the forestry sector and so as not to undermine the long term competitiveness of the sector’s companies, which are currently weighed down by higher supply costs than those of most of their competitors. There is also an urgent need for the authorities responsible for forestry sector to adopt measures which can help improve yields, increase Portugal’s output of eucalyptus timber and extend certification of woodlands management.
The difficult situation which Portugal is currently facing also means it is imperative for the country to tackle a number of other serious impediments to the competitiveness of its exporters. Specifically, Portugal needs to address the high costs and other shortcomings of its logistical infrastructures, and especially its railways and ports, which are serious cause for concern.
The Portucel group has shown it can compete with success on the global market, and is today the European leader in its industry. What is more, the Group’s financial health means it is well placed to plan for its future development.
Without neglecting our continued search for other opportunities, the Group’s immediate attention is concentrated on developing its integrated forestry, pulp and power project in Mozambique, where it has recently obtained a second land-use license, allowing it to speed up the implementation of this important project.
I would like to extend a word of appreciation to all those who’s commitment, dedication and expertise have helped make Portucel a powerhouse in the Portuguese economy and a leading player in the international pulp and paper industry.
Setúbal, January 30th 2012
José Honório Chief Executive Officer
Consolidated Annual Report 2011 10
1. The Portucel Group in 2011
Business Areas
Research & Development
Agro-Forestry
Pulp Production and Marketing Portucel Group
Paper Production and Marketing
Energy
Other Related Operations
Location of Production Plants, Commercial Subsidiaries, R&D Units and Nurseries
Consolidated Annual Report 2011 11
Economic and Financial Indicators
2011 2010 2009 2008 2007
Million euros Total sales 1,487.9 1,385.5 1,095.3 1,131.9 1,147.4 EBITDA (1) 385.1 400.2 222.2 271.7 340.7 Operating earnings (EBIT) 266.2 277.8 132.1 181.1 260.3 Financial earnings -16.3 -20.1 -7.5 -19.6 -27.5 Net Profit 196.3 210.6 105.1 131.1 154.0 Cash Flow (2) 315.2 332.9 195.2 221.7 234.4 Investment 33.0 95.5 505.4 246.9 52.8 Net debt 422.8 652.7 670.0 459.7 367.8 0.0 Net assets 2,821.3 2,672.5 2,561.2 2,451.3 2,458.7 Liabilities 1,343.1 1,369.0 1,290.6 1,205.1 1,282.4 Equity 1,477.6 1,303.5 1,270.6 1,246.3 1,176.2
EBITDA / Sales (in %) 25.9% 28.9% 20.3% 24.0% 29.7% ROS 13.2% 15.2% 9.6% 11.6% 13.4% ROE 14.1% 16.4% 8.4% 10.8% 13.4% ROCE (4) 13.8% 14.3% 7.2% 11.1% 16.5% Equity to assets ratio 0.52 0.49 0.50 0.51 0.48 Net debt / EBITDA 1.1 1.6 3.0 1.7 1.1
Euros Net earnings per share 0.26 0.27 0.14 0.17 0.20 Cash flow per share 0.41 0.43 0.25 0.29 0.31 EBITDA per share 0.50 0.52 0.29 0.35 0.44 Book value per share 1.93 1.70 1.66 1.62 1.53
(1) Operating results + depreciation + provisions (2) Net profits + depreciation + provisions (3) Includes market value of own shares as at 31/12 (4) Operating results / (average equity + average net debt)
Consolidated Annual Report 2011 12
The Portucel Group
The Group’s contribution to the Portuguese economy
The Portucel Group is of structural importance to the Portuguese economy, as reflected by the following facts and figures for 2011: • Annual turnover of approximately 1.5 billion euros • Exports in excess of 1.2 billion euros • The Group accounts for approximately 3% of Portuguese visible exports and 0.7% of the country’s GDP • 95% of its sales are made to 115 countries, spread over five continents • Sales to North America and the Middle East accounted for 8% and 13% of Portuguese exports to these markets • European leader in the production of certified forestry plants • European leader in the production of BEKP (Bleached Eucalyptus Kraft Pulp) and the 4th leading producer worldwide • European leader in the production of UWF (uncoated woodfree) paper and the 6th leading producer worldwide • World leader in genetic improvements to Eucalyptus globulus • Navigator – the world’s top-selling brand of premium office paper • Annual production capacity for 1.6 million tons of paper, 1.4 million tons of pulp and 2.5 TWh in power generation • The direct workforce numbers 2 290 employees, whilst generating indirect employment also counted in the thousands • More than 5 500 Portuguese suppliers • Manages 120 thousand hectares of woodlands • Portugal’s leading producer and planter of certified trees • The first organization in Portugal to have its forest management operations certified by the FSC® (Forest Stewardship Council®)1 as well as under the PEFC (Programme for the Endorsement of Forest Certification schemes)2 • The carbon retained each year by the Group’s woodlands represents more than double the
CO2 recorded at all its industrial facilities • The Group is Portugal’s largest producer of energy from biomass, accounting for 52% of total power generation from this renewable source • Power output amounts to almost 4% of the total electricity generated in Portugal • The Group accounts for approximately 9% of total conventional and containerized cargo handled at all Portuguese ports
1 User license code: FSC C010852 2.User license code: PEFC/13-23-001
Consolidated Annual Report 2011 13
Group Profile
The Portucel Group owes its success to a strategy of applied research in forestry and manufacturing, combined with investment in high tech plants, innovation and marketing, as well as a continuous training programme for its skilled professionals. The Group is currently the leading European manufacturer of UWF (uncoated woodfree) printing and writing paper, a category which includes office paper, placing Portugal at the top of the ranking of countries manufacturing this type of paper. The Group is also Europe’s leading manufacturer, and one of the largest producers in the world, of bleached eucalyptus kraft pulp (BEKP).
The strategy of growth pursued by the Group has been powered by capital expenditure projects in excess of 900 million euros, the centrepiece of which is the new Setúbal Paper Mill, which started up in 2009. All this has permitted the Portucel Group to consolidate its position as one of Portugal’s leading creators of wealth, accounting for 3% of visible exports and generating an extremely high – and unrivalled – level of National Value Added (NVA), due to the fact that its products are obtained almost entirely from Portuguese raw materials and resources. This achievement was highlighted at the 2011 Export & International Expansion Awards, organized by Banco Espírito Santo and Jornal de Negócios, in partnership with Coface and McKinsey & Company, at which the company incorporated for the new Paper Mill project in Setúbal (About the Future) was voted “Best Exporter Company – Tradable Goods”.
A number of factors lie behind the growing importance of exports in the Group’s overall turnover, not least the manufacture of products which have gained a high international profile, competing successfully on extremely competitive markets, and also a business model which sets out to create value on the basis of innovation and development of our own brands, which today account for 64% of all sales of sheeted paper. Special attention should be drawn to the Navigator brand, the world leader in the premium office paper segment.
The Group sells its products to 115 countries over five continents, with a special focus on Europe and the US, and 34% of its exports are destined for markets outside the European Community.
In 2011, the Portucel was responsible for 76% of European exports of UWF printing and writing paper to North America, 62% of these exports to Africa, 35% to the Middle East, 37% to Latin America and 3% to Asia. These figures clearly underline the Group’s strong international presence.
The Group’s existing production structure comprises an industrial complex in Cacia, producing cellulose pulp and energy, and two integrated industrial complexes producing cellulose pulp, energy
Consolidated Annual Report 2011 14
and paper, located in Figueira da Foz and Setúbal, setting international standards for scale and technological sophistication.
The Group has pursued a policy of developing Portugal’s woodlands and runs the country’s largest nursery for forest species, producing some 7.4 million plants each year, of which 85% are eucalyptus and maritime pine, 13.5% other forest species (mainly oak and cork oak) and 1.5% ornamental plants. From 2012 onwards, as the result of a major investment programme in expansion and modernization, the Group’s nurseries will be responsible for producing 12 million certified plants each year, making them the largest such facility for forest plants in Europe.
Sustainable woodlands management is one of the Group’s strategic concerns. As one of the leading players in the eucalyptus forestry sector, the Portucel Group is responsible for the management of approximately 120 thousand hectares of forest, and was the first organization in Portugal to obtain certification both from the FSC – Forest Stewardship Council and under the PEFC – Programme for the Endorsement of Forest Certification schemes.
The Group has been a driving force behind the expansion of the forest certification process in Portugal, which it has identified as essential in order to assure that the country’s forestry products are competitive on international markets. These efforts have involved cooperation agreements signed with forestry producer organizations and awareness raising campaigns aimed at landowners
To commemorate the International Year of Forests in 2011, the Group organized a conference on “The Forest Plantations of Tomorrow”, bringing together leading experts from around the world to debate the role of forestry plantations in creating wealth and social wellbeing.
Biodiversity conservation is another area in which the Portucel Group has invested heavily, integrating measures to preserve habitats and species identified in its woodlands holdings into its forest management procedures.
The Group’s approach to biodiversity issues has in fact been the subject of case studies presented in various national and international publications and has formed one of the central themes of the ”New Generation Plantations” Project coordinated by WWF International, in which the Group is actively engaged. This type of plantation maintains the integrity of ecosystems and the high conservation value of woodlands, integrating processes for effective participation by stakeholders and contributing to economic growth and job creation.
Consolidated Annual Report 2011 15
The forests managed by the Group represent an important carbon sink, helping to reduce greenhouse gases in the atmosphere. The carbon retained each year by Group forests is equivalent to more than double the CO2 emissions from all its industrial facilities.
The Portucel Group was one of the first Portuguese companies to be invited to join the then newly founded (in 1993) WBCSD – World Business Council for Sustainable Development and, since 1995, has taken an active part in the work of this organization which brings together leading international corporations in its quest to boost awareness and acceptance of sustainable development principles.
The Group was accordingly one of the founders of the SFPI – Sustainable Forest Products Industry programme organized by the WBCSD, and in conjunction with two of its Portuguese fellow members went on to found BCSD-Portugal, a regional affiliate of the WBCSD network, which now boasts a membership including the country’s leading corporations and is chaired by the Portucel Group.
As part of its policy of social responsibility, the Group invested in 2011 approximately 3 million euros in wildfire prevention and fighting, by far the largest private contribution to forestry protection in Portugal. The Group’s actions benefit the country’s woodlands in general, as more than 85% of the work by the fire fighting organization to which the Group is the major contributor (Afocelca) is on land owned by third parties, providing valuable assistance to the National Fire Fighting and Civil Protection Service
In the field of Research & Development the work carried out by RAIZ – Instituto de Investigação de Floresta e Papel has supported cutting-edge projects for improving the characteristics of eucalyptus and improving sustainable forestry management practices, ensuring the availability of raw material of a high standard for the manufacture of top quality paper.
One of the key features of the Group’s sustainability strategy has to do with the production of renewable energy. The Portucel Group is currently a leading force in this sector and the country’s top producer of “green energy” from biomass, a renewable energy source, accounting for more than 50% of the power generated from biomass in Portugal. Overall, the electricity generated by the Group corresponded to almost 4% of the country’s entire power output.
The Group’s commitment to renewable energy sources and best available techniques makes its plants a model of sustainability and eco-efficiency. In addition to increasing their output of renewable energy, the plants are examples of rational energy use and optimized energy efficiency in production processes. The Group’s industrial facilities reuse and reclaim more than 83% of the industrial waste produced.
Consolidated Annual Report 2011 16
The Group is responsible for generating skilled employment and specialised professional careers. At the end of the year, it had a direct workforce of 2,290 employees, as well as helping to create a much larger volume of indirect employment, especially in the forestry, logistical, engineering and industrial maintenance sectors.
The Portucel Group has developed its operations whilst maintaining a firm commitment to social responsibility, supporting and contributing to a significant range of projects and voluntary schemes to preserve the natural heritage and quality of life of local communities.
In 2011, the Group undertook a number of programmes to raise local awareness, especially amongst young people, of the importance of protecting forests and the environment. This included “Give a Hand to Nature”, an educational event at the Group’s Espirra Estate involving some 170 primary school children from the local communities around its plants.
Another important venture in this field was the Open Doors programme, with the slogan “Portuguese paper: more important than you might imagine”. This involved guided tours of the new paper mill, inaugurated just two years ago, for groups of Setúbal residents, helping to build a culture of openness, dialogue and engagement with local communities. At the same time, the Group launched a social project, through which it has worked with leading Portuguese charities to donate essential foodstuffs for needy families.
Consolidated Annual Report 2011 17
Analysis of Results
Leading Indicators - IFRS
(5) FY FY % Change 2011 2010 2011/ 2010 Million euros Total sales 1 487.9 1 385.5 7.4% EBITDA (1) 385.1 400.2 -3.8% Operating profits 266.2 277.8 -4.2% Financial results - 16.3 - 20.1 -18.6% Net earnings 196.3 210.6 -6.8% Cash Flow (2) 315.2 332.9 -5.3% Capex 33.0 95.5 -62.5 Net debt (3) 422.8 652.7 -229.9
EBITDA / Sales (%) 25.9% 28.9% ROS 13.2% 15.2% ROE 14.1% 16.4% ROCE 13.8% 14.3% Equity ratio 52.4% 48.9% (4) Net Debt / EBITDA 1.1 1.6
(1) Operating results + depreciation + provisions (2) Net profits + depreciation + provisions (3) Includes market value of treasury stock (4) EBITDA corresponds to the last 12 months (5) Percentage variation corresponds to figures before rounding up/down
In a year marked by a particularly harsh economic climate, the Group recorded turnover of approximately 1.5 million euros, representing growth of 7.4% over the previous year. This increase was due essentially to growth in sales of uncoated woodfree (UWF) printing and writing paper, made possible by rising output from the new paper mill and by the growth in power output.
The new UWF paper mill in Setúbal achieved an output at year-end 2011 equivalent to 97% of its nominal capacity, producing approximately 485 thousand tons of paper. Growing output allowed the Group to achieve a 7% increase in the quantity of paper placed on the market which, combined with rising paper prices over the course of the year, resulted in overall growth in paper sales of more than 9%.
Despite an increase in the volume of bleached eucalyptus kraft pulp (BEKP) produced, the Group recorded a slight decline in sales in relation to the previous year, due to increased integration of BEKP into production at the new paper mill in Setúbal. Combined with a steep reduction in prices
Consolidated Annual Report 2011 18
over the period, this resulted in a reduction of approximately 16% in the value of market pulp sales.
In the energy sector, the Group continues to record strong performance, with total power output of approximately 1.9 TWh in 2011. This segment grew by more than 20% over the previous year.
Costs evolved unfavourably in relation to the previous financial year, due to rising prices for timber and chemicals, especially during the first half. The Group also experienced an increase in certain fixed production costs, such as maintenance and personnel expenditure. Maintenance costs were influenced by the recognition in specific periods of costs relating to maintenance stoppages in 2011 and 2010. The increase in personnel expenditure was due essentially to higher pension fund costs and costs related to streamlining the workforce.
In this scenario, consolidated EBITDA stood at 385.1 million euros, down by 3.8% in relation to 2010. This resulted in an EBITDA / Sales margin of 25.9%, down by 3.0 percentage points in relation to the previous year, reflecting the above mentioned increase in costs.
Operating results were down by 4.2%, due in part to the fact that the 2010 results had been boosted by reversals of provisions during the period.
The Group recorded a negative financial result of 16.3 million euros, which compares favourably with the similarly negative figure of 20.1 million euros recorded in 2010. This progress is explained essentially by a significant reduction in net debt in relation to the previous year and by improving yields on the application of cash surpluses.
The Group accordingly recorded a consolidated net result for the period of 196.3 million euros, down by 6.8% in the previous year.
Consolidated Annual Report 2011 19
Financial Situation
At 31 December 2011, interest-bearing net debt stood at 422.8 million euros, down by 229.9 million euros in relation to year-end 2010, thanks to the combined effect of the Group’s capacity for cash- flow generation and a sharp reduction in capital expenditure, with the conclusion of the phase of major projects for expansion and modernization of the Group’s industrial assets, undertaken over recent years.
Financial autonomy stood at 52.4% at the end of September and the Net Debt / EBITDA ratio stood at 1.1, representing an improvement on year-end 2010 (1.6) and still at conservative levels.
The Group’s long term debt stood at 566.8 million euros at 31 December 2010, whilst debt maturing in less than one year totalled 164.1 million euros. With the capability for cash flow generation already mentioned, liquid assets of approximately 267.4 million euros and contracted credit facilities of 80 million euros, the Group enjoys a level of liquidity which will allow it to honour its existing liabilities without requiring any significant recourse to the debt market.
Indebtness Dec‐2011 Dec‐2010 Figures in Euros
Non‐current Bond Loans 400,000,000 550,000,000 Bank Loans 169,047,619 183,125,000 Non‐current debt 569,047,619 733,125,000 Expenses with the issue of bond and bank loans 2,234,589 3,428,093 Total non‐current net debt 566,813,031 729,696,907
Current Bond Loans 150,000,000 0 Short term bank Loans 14,085,292 91,250,000 Total current debt 164,085,292 91,250,000
Cash and cash equivalents Cash 48,230 45,562 Short‐term bank deposits 7,103,485 9,462,415 Other treasury applications 260,280,000 124,450,000 Total cash and cash equivalents 267,431,715 133,957,977
Total net debt 463,466,608 686,988,930
Treasury shares at their market value 40,641,775 34,263,719
Total adjusted net debt 422,824,833 652,725,211
Consolidated Annual Report 2011 20
Development
Over the course of 2011, difficulties have continued to prevent the Group from making progress on the projects for integrated forestry and eucalyptus pulp production it would like to implement in Latin America.
In Mozambique, as duly disclosed to the market, the Council of Ministers approved a resolution granting Portucel a land use licence for an area of 182,886 hectares, located in Manica Province.
Fieldwork went ahead during the year, involving tests and experimental plantations, in Zambézia and Manica provinces, with trials of more than 50 eucalyptus varieties from different origins, in order to select the varieties demonstrating the best production cropping potential, in line with the soil and climate conditions in the various areas earmarked for the project.
Risk Management
The Group’s operations are exposed to a variety of financial risk factors: exchange rate risk, interest rate risk, credit risk and liquidity risk. The Group operates a risk management programme, focussed on analysis of financial markets, seeking to minimize the potential adverse effects on its financial performance.
Exchange Rate Risk
Variations in the exchange rate of the Euro against other currencies can significantly affect the Company’s revenues in several ways.
On the one hand, a significant part of the Group’s sales is denominated in non-Euro currencies, meaning that the evolution of these currencies can have a significant impact on the Company’s future sales; the currency with the greatest impact is the US dollar. Sales in GBP and CHF are also significant, whilst sales in other currencies are less so.
Certain raw materials are also purchased in USD, notably imports of timber and long fibre pulp, meaning that variations in the respective exchange rate can have an impact on purchase prices.
In addition, once the Company makes a sale in a non-Euro currency, it runs an exchange rate risk until the receipt or payment of this sale or purchase, unless it takes out hedges for this risk. This
Consolidated Annual Report 2011 21
means that, at any given time, its assets include a significant sum in receivables exposed to exchange rate risks, as well as a set of payables, albeit smaller in scale, with the same exposure.
The Group has a commercial subsidiary in the US, Portucel Soporcel North America, with equity of approximately USD 25 million, exposed to exchange rate risk. Other than this operation, the Group has no investments in materially relevant operations abroad with net assets exposed to exchange rate risks.
Occasionally, and as it sees fit, the Group has recourse to derivatives to manage its exchange rate risk, in keeping with a policy which is reviewed from time to time and designed to limit the foreign exchange exposure associated with future sales and purchases, receivables, payables and other assets denominated in non-euro currencies.
Accordingly, the Group took out a zero cost collar in order to hedge its Swiss franc risk, which has accounted for a growing proportion of its foreign exchange risk. This collar had a nominal value of CHF 24 million, maturing on 30 December 2011.
In July 2011, the Group purchased a EURCALL/USDPUT option to cover the EUR/USD risk for its estimated sales from August to December of the same year, with a nominal value of USD 30 million.
Further derivatives were contracted in September and October in the form of a zero cost collar with a total value of USD 100 million, to cover the EUR/USD risk of sales contracted from October 2011 to October 2012.
In relation to its foreign exchange exposure on customer accounts, the Group maintained its policy of hedging its net exposure to USD and GBP at all times by contracting foreign exchange forwards for the expected maturities of these receivables.
In order to hedge its foreign exchange exposure on the equity of its commercial subsidiary in the US, the Group renegotiated during the course of 2011 the foreign exchange forward it had contracted in 2010.
Interest Rate Risk
The cost of the financial borrowing contracted by the Group is indexed to short term reference rates, reviewed at intervals of less than one year (generally six months for medium and long term debt), plus risk premiums as negotiated from time to time. This means that variations in interest rates can
Consolidated Annual Report 2011 22
affect the Group’s results.
The Group has made use of derivatives, in the form of interest rate swaps, in order to fix the interest rate on its borrowing, within given parameters. The various swaps contracted in 2005 matured in 2010, and at year-end 2011 there were no interest rate hedges in force.
Credit Risk
The Group is subject to risk on the credit it grants to customers, and has adopted a policy of managing this exposure by keeping it within set levels, through the negotiation of credit insurance with an independent specialist insurer.
As a result of the strict credit control policy followed by the Group, there were practically no bad debts during 2011.
Liquidity Risk
In view of the medium/long term nature of its investments, the Group has sought to structure its debt in a form that matches the maturity of the associated assets, for this reason seeking to contract long term finance, and to refinance short term debt.
As stated above, at year-end 2011, the Group had gross long term borrowing of 566.8 million euros and debt maturing in less than one year of 164.1 million euros. This short term liability is easily covered by surplus cash flow accrued by the company and credit facilities contracted but not used, meaning that the Group enjoys a very comfortable liquidity position.
Considering the structure of the debt contracted by the Group, with maturities matching the assets being financed, the Group is confident it has assured the capacity to generate the future cash flows needed to discharge its liabilities, to guarantee capital expenditure in line with its medium/long term plans and to provide shareholders with returns at the levels traditionally provided by the Company.
Consolidated Annual Report 2011 23
2. Capital Markets and Share Price Performance
Capital Markets
The performance of the capital markets over the course of 2011 reflected the serious financial crisis affecting the Euro Zone, causing considerable instability on European stock exchanges. The principal markets recorded significant losses, with the Paris, London and Madrid share indexes down by 17%, 15.5% and 13.1% respectively. The Portuguese stock exchange was particularly hard hit, with the PSI20 index ending the year down by 27.6%.
In this economic environment, and in a situation of recession in paper consumption, companies in the industry felt the brunt of the losses, ending the year with substantially lower share prices. The HX Paper & Forest index recorded an accrued drop from the start of the year of approximately 37%, with shares in Scandinavian companies presenting severe losses. Pulp producers in Latin American also presented negative performance overall, with only a few North American producers recording an increase in share price.
Against this background, the performance of Portucel shares in 2011, albeit negative, actually compares favourably with that of its European competitors. Portucel shares ended the year at 1.84 €, down on the year by a total of 19.2%. The peak closing price in 2011 was 2.57 €/share, recorded on 17 February, with a low of 1.70 €/share recorded on 21 November. Average monthly trading in Portucel shares in 2011 stood at approximately 10 million. At year end, treasury stock stood at approximately 22.1 million, corresponding to 2.88% of the share capital.
Consolidated Annual Report 2011 24
Portucel vs. European Indexes in 2011 (31/12/2010= 100)
120 115 110 105 100 95 90 85 80 75 70 65 31-12-2010 26-01-2011 21-02-2011 19-03-2011 14-04-2011 10-05-2011 05-06-2011 01-07-2011 27-07-2011 22-08-2011 17-09-2011 13-10-2011 08-11-2011 04-12-2011 30-12-2011
Portucel IBEX 35 PSI20 CAC 40 FT30
Portucel Average Share Price and Volume in 2011
Million € / share shares 25.0 2.6 2.5
20.0 2.4 2.3 2.2 15.0 2.1 2.0 10.0 1.9 1.8 5.0 1.7 1.6 0.0 1.5 Jul-11 Apr-11 Oct-11 Jun-11 Jan-11 Mar-11 May-11 Aug-11 Nov-11 Feb-11 Sep-11 Dec-11
Volume in 2011 €/share
Consolidated Annual Report 2011 25
3. Market Performance
Economic Environment
Basic indicators deteriorated across the board industry in 2011 in the world’s main developed markets as business conditions deteriorated: the pace of growth slowed significantly in the US, the Japanese economy was hit hard by the consequences of a devastating earthquake, whilst Europe experienced a worsening of the sovereign debt crisis and the successive shock waves this produced. Global economic growth, at approximately 3.5%, was based on the performance of the emerging economies, which continued to expand.
In a context of growing fears as to the sustainability of State financing, especially in the Euro zone, and in which unemployment remained extremely high, the advanced economies gave clear signs of a slowdown, pointing to conditions which could tip over into recession in the short term, with the highest risk presented by European countries.
Over the course of the year, the Euro Zone gradually became the main focus of financial instability. Economic growth was relatively weak (approximately 1.5% on average), supported by the performance of the centrally-located countries (Germany in particular), with the outlying countries on a contrasting downward course. Recent months have been marked by signs of an effective slowdown in the pace of growth, amounting in some cases to recession, with regular increases in the rate of unemployment.
The financial markets have severely penalized the Euro zone economies, exploiting the currency’s fragility. Diminishing business confidence, due to the uncertainty generated by the sovereign debt crisis, has been decisive in the poor growth experienced in recent months.
As the “sovereign debt crisis” has increasingly worked its way from the outlying nations to those at the centre, the deterioration in borrowing terms for European Union countries has become increasingly visible, leading to widespread implementation of highly restrictive budgetary policies. These policies, which the contaminated economies have adopted simultaneously as a response to the crisis, add further weight to expectations of negative business growth. In a context where the fortunes of the banking sector are increasingly tied to the evolution of sovereign debt markets, the strains observed in the financial markets and the drying up of liquidity have hindered the funding of European banks and contributed decisively to a significant slowdown in the economy.
Over the course of the year, it became increasingly clear that the political leaders in the Euro zone needed to take decisive action to increase budgetary coordination and integration, and expectations
Consolidated Annual Report 2011 26
grew that the ECB (European Central Bank) would take a more active role in the financial stabilization of the economy. At the final EU summit in 2011, progress was made towards budgetary integration, but the meeting failed to adopt the decisions needed to assure an immediate response to the crisis of liquidity and confidence. At the end of the year, the ECB went ahead with a reduction in reference rates and stepped up its operations to provide liquidity in the system.
In Portugal, the situation was affected above all by the programme of financial adjustment currently underway, which involves a highly restrictive budgetary policy and an inevitable impact in terms of economic retraction. GDP is thought to have contracted by 1.6% in 2011, with the jobless rate climbing to over 12%. On the positive side, exports performed well (up by some 7%, despite the gloomy situation in the Euro zone, which is the main export destination), and this will be a crucial factor in turning around the critical state of the country’s economy.
In the USA, although the economy remains relatively sluggish (growth of 1.7% in 2011), there have been signs in recent months of a positive tendency, with more encouraging figures for household spending and private investment. This is due in part to an expansionist monetary policy being pursued by the United States Federal reserve, possibly close to the limits of its effectiveness. However, the stand-offs in Congress on an agreement on budgetary policy have served to generate insecurity and strain in the financial markets, undermining any move towards firmer growth.
The main emerging economies (above all China and India) continued to record extremely high rates of growth, despite a slight slowdown in the second half of the year. Growing internal demand, low levels of debt and the macroeconomic stability assured by ample foreign reserves are all factors which have supported the performance recorded by these economies.
Over the course of the first half, the euro rose sharply against the dollar, with the exchange rate moving close to 1.5 USD/EUR. As the crisis in the Euro zone deepened in the second half, the euro lost ground again, ending 2011 at around 1.3 USD/EUR, where it had started the year.
The Brazilian real and the Chilean peso also depreciated against the euro during 2011, especially in the final quarter of the year.
In this situation, despite the uncertainty surrounding the future of the single currency, the exchange rate situation undermined the competitiveness of the Portucel Group in relation to its rivals on the American continent.
At a juncture at which Mozambique has begun to figure in the long term strategic development of the Portucel Group, a short word is warranted on the country’s economic performance. Growth stood at approximately 7% in 2011, above average for Sub-Saharan Africa, and the metical appreciated by some 20% against the euro. This growth was sustained primarily by investment and exports relating to the country’s natural resources – coal and natural gas – and to aluminium processing.
Consolidated Annual Report 2011 27
Paper
Market
The financial year of 2011 was marked by a sharp downturn in the global economy, with the economies in key regions for the Group’s business activities - Europe and the US – recording significant slowdowns in GDP growth. The emerging economies in Asia and Latin America also experienced slower growth in 2011. The Group’s commercial performance is significantly influenced by the resulting business climate, and has felt the effects of high and growing unemployment rates in its main markets and of contraction in the advertising and printing sectors.
Estimates point to a decline in demand for UWF (uncoated woodfree) paper in Europe of 4% in relation to 2010, whilst consumption in the cut-size segment remained unchanged. The European UWF market has shrunk by approximately 950 thousand tons since 2008, corresponding to a rate of around 4% a year. Despite this, the Portucel Group succeeded over this same period in increasing the quantity of paper placed in Europe and the rest of the world by approximately 500 thousand tons.
This sharp drop in demand was partially offset by reductions in imports from outside Europe and by rising exports by the European industry. Nonetheless, producers experienced dwindling operating rates and order books over the course of the year, putting the profitability of some European production units under strong pressure and setting off a further wave of capacity closures, with estimates pointing to more than 550 thousand tons of annual UWF capacity being closed down. As a result, the average capacity utilization rate in Europe stood at 92%, rising to 94% in the final quarter after the implementation of closures. The Portucel Group once again operated at full capacity.
The UWF market in the US declined again in 2011, with a reduction estimated at approximately 3%, whilst the American production sector maintained a capacity utilization rate of 90%.
Performance
In this market context, total paper sales increased by 7% in 2010. This performance was achieved thanks to solid growth in all regions of the world and moves to broaden geographical coverage of sales, with the Group exporting to 115 countries in the course of 2011.
The Group expanded its sales on the European market, improving the mix, and in particular achieving strong growth in cut-size sales, up by approximately 6%, allowing it to increase its market share in these products.
Consolidated Annual Report 2011 28
Business growth was also significant in the US, where the Group recorded 20% expansion in overall product sales. After a full decade of regular sales on this market, the Group now enjoys a market share of approximately 2%, having increased this share by 30 thousand tons in 2011, thanks to a business model based primarily on premium cut-size products and mill brands.
Despite the difficult environment described above, the Group succeeded in achieving 6% growth in sales of premium products, allowing it to maintain a level of premium products as a proportion of total sales unrivalled by other manufacturers of the same size.
Prices
Prices performed favourably in 2011, with the European benchmark index (PIX Copy B) standing at 870 €/ton, as against 814 €/ton in 2010, up by 6.8%.
Despite the sharp increase in quantities placed on the market, the Group’s sales prices in Europe were in line with market trends. However, in overseas markets, sales prices followed a downwards course, with average prices in USD/t falling in relation to 2010. This fact, combined with the effect of the changing USD/EUR exchange rate, had a negative impact on sales prices in these export destinations.
Branding
The Portucel Group regards the development of its own brands as a key factor in its business strategy. Sales of mill brands increased significantly in 2011, with double-digit growth in all regions of the world (Europe, US and other markets). This was particularly impressive in the demanding European market, contributing decisively to an increase of 4 percentage points in the proportion of total cut-size sales represented by sales of the Group’s own brands.
The recently published Europe Brand Equity Tracking Survey, from Opticom International Research, offering independent research data on office stationery brands, has for the tenth time examined the way in which European consumers assess brands. Navigator was regarded the second most valuable brand in Europe, taking into consideration brand awareness, perceived quality and consumer loyalty, and has consistently climbed up the ranking over the years. The Discovery brand made its first appearance in the top ten, reflecting its established presence in the market, thanks to its environmental attributes and excellent performance.
Consolidated Annual Report 2011 29
Navigator
Navigator consolidated in 2011 its status as the world best-selling premium brand of office paper.
The brand introduced a new brand image for the European market in 2011, enabling it to strengthen its positioning with consumers as an innovative and contemporary product.
In the US market, the growing importance of the digital printing segment led to a repositioning of Navigator Platinum, ideal for this use thanks to its superb quality in terms of whiteness and smoothness. This product is now marketed as Navigator Platinum Digital.
The brand’s attributes have been repeatedly acknowledged by consumers and reflected in the findings of independent research. In the Brand Equity Tracking Survey – Office Paper, conducted in 2011 by Opticom International Research AB, Navigator recorded outstanding results in all assessments – awareness, quality perception and loyalty – and was classified as the office paper mill brand with the greatest brand equity. It was also the fastest growing brand since 2005, leaping from 7th to 2nd position in the European ranking of office paper brands with the best Brand Equity Index (BEI).
Another study conducted annually by EMGE – Paper Industry Consultants in the wholesale/retail sector confirms Navigator as the leading European brand, in terms of both spontaneous awareness and brand performance, the weighted average of various technical and marketing attributes. This was in fact the 7th time that Navigator was named as the leading brand in terms of awareness in Western Europe.
This exceptional performance over recent years has earned Navigator the title of "World Best Selling Premium Office Paper ", with sales in more than 90 countries.
Highlights in 2011 • 6% growth in volume sold • 6th global promotion, with around 1 million participants, from 139 countries around the world • Launch of Navigator Platinum Digital in the US market • Mill brands with the best Brand Equity Index in the “Brand Equity Tracking Survey – Office Paper” • Top for brand awareness and brand performance in the EMGE survey • A strong presence of Navigator at the main European trade fairs, including Paperworld and Big Buyer www.navigator-paper.com
Consolidated Annual Report 2011 30
Discovery
Discovery is a paper brand which combines superb performance with excellent environmental credentials.
Top quality raw materials and cutting-edge technology come together to produce paper with a lower grammage, but improved performance, jam-free in the most demanding equipment.
Discovery’s environmental concerns are reflected in the fact that more paper is produced for the same quantity of timber, in comparison with traditional 80g/m2 paper products, whilst maintaining the same quality standards.
Investment in the production process over recent years has generated significant efficiency gains in water and energy consumption, CO2 emissions and use of fossil fuels.
2011 saw the launch of new packaging and media materials, helping the brand to strengthen its position as product offering excellent machine performance, without neglecting environmental issues.
The financial year of 2011 was also a milestone for Discovery, which for the first time in its history broke into the top 10 of the Brand Equity Index published in the respected Opticom survey. This unprecedented achievement means that the Group now boasts two brands in this elite group.
Highlights in 2011 • 16% growth in volume sold (18% in Europe) • Sales to more than 60 countries • Leadership extended in Europe in the 75g/m2 category • Discovery breaks into the top 10 of the Brand Equity Index, in the Opticom Survey www.discovery-paper.com
Pioneer
In the course of 2011, the premium office paper brand Pioneer consolidated its new image, especially in Europe, underlining its contemporary and dynamic appeal.
A major development in 2011 was the launch of Pioneer Fresh Inspiration 75 g/m², offering reduced grammage, with clear benefits for the environment, whilst maintaining the high quality standards associated with the brand.
Consolidated Annual Report 2011 31
Inspired by the young, trendsetting women of today, looking for original but practical solutions, Pioneer Fresh Inspiration transmits a sense of youth and confidence, is simple and easy to use and offers superb results. Fresh Inspiration also evokes ideas of freedom and spontaneity, in tune with the informal vibe of its target group.
Pioneer Fresh Inspiration has been designed to satisfy consumers with a new approach to existing resources. The marketing claim “do more with less” ties in with the philosophy of women looking to enjoy life with a positive attitude and a high degree of environmental awareness, women who want to make the most of natural resources.
As in the whole the range, the packaging for Pioneer Fresh Inspiration features a reference to the brand’s partnership with the breast cancer charity, Associação Laço, as part of the policy of social responsibility pursued by the brand, geared to the needs and experiences of its target group.
Pioneer Fresh Inspiration also features the Ecolabel and the FSC seal of approval.
The Pioneer Graphic range has been especially developed to meet the needs of the printing industry.
In tune with the Pioneer brand, these printing papers are also marketed using an original and sophisticated positioning and communication, and have established themselves as a benchmark for the main European ranges of UWF paper.
Highlights in 2011 • 23% growth in volume sold • Consolidation of the international relaunch of the brand’s entire image and media materials in the premium office paper segment • Increased and consolidated support for Laço, a breast cancer charity promoting early diagnosis • Launch of Pioneer Fresh Inspiration 75g/m2 www.pioneer-paper.com www.pioneer-graphic.com
Inacopia
Inacopia was the first European office paper to be produced from Eucalyptus globulus pulp, and is today a well established brand around the world with a reputation for high quality standards.
Consolidated Annual Report 2011 32
With a broad range including a line of premium quality products and another of standard quality products, Inacopia offers a solution for each type of application, depending on the document requirements.
Inacopia achieved excellent performance in its two main markets, France and Germany, with a growth of 21% and 34%, respectively.
The 2011 Opticom survey showed that the brand has increased its awareness in Europe, whilst achieving a respectable 12th place in the BEI ranking.
Highlights in 2011 • 11% growth in volume sold (16% in Europe) • Sales to more than 40 countries • 12 place in BEI ranking in 2011 Opticom survey www.inacopia-paper.com
Target
The Target brand features a range which offers the ideal choice for consumers who have an idea and want to make an impression.
The brand’s distinctive features are its ready-to-print stance and the offering of different office stationery products for distinct end uses. The range includes paper for colour-intensive applications (Target Personal), internal corporate applications (Target Corporate) and document production (Target Professional).
In 2011 the brand expanded its range with the launch of Target Personal 160g/m2 and Target Professional 70g/m2.
For the printing segment, the range also offers two high quality products: Target Plus Offset and Target Plus Preprint.
Highlights in 2011 • 29% growth in volume sold • Launch of Target Personal 160g/m2 and Target Professional 70g/m2 www.target-paper.com
Consolidated Annual Report 2011 33
Soporset
In 2011, the Soporset brand celebrated 20 years as a market success, highlighting the occasion with the presentation of a new communication concept. As the European leader in the premium uncoated offset and pre-print papers, the new brand concept represents a strong commitment to excellent performance, the brand’s central selling point, combined with a fresh approach to technology and the environment. The new communication concept included the launch of a catalogue, new press advertisements and also a refurbished website, as well as other communication materials.
Marketed to more than 80 countries, Soporset’s leading status has been confirmed by a number of market surveys, attesting to its superb performance and printing quality and the high level of awareness enjoyed by the entire Soporset range. Soporset is the most popular premium offset paper with graphic designers in Europe and the leader in terms of spontaneous awareness.
The Soporset range comprises Premium Offset and Premium Pre-print products and has been designed to assure top performance not only in offset printing but also in personalization in any office equipment.
Highlights in 2011 • Launch of new brand communication concept • Sales to 81 countries • 25% growth in volume sold
www.soporset.com
Inaset
Tradition, experience and trust are the three central values around which Inaset is positioned. Inaset combines the tradition of a pioneering brand with the spirit of innovation which it has retained over more than three decades, and which has made it a benchmark amongst the best offset papers worldwide.
The Inaset range has focussed on educating its customers, organizing a number of training activities over the course of 2010. Despite the severe crisis in the printing industry, the brand has achieved growth thanks to its ability to instil customer loyalty.
Consolidated Annual Report 2011 34
Highlights in 2011 • 3% growth in volume sold (19% in Europe) • Sales to some 35 countries www.inaset-paper.com
Explorer
With a concept linked to adventure sports and based on aspirational values, the Explorer office paper brand launched its first worldwide promotion in 2011 in which it gave away 100 Garmin Dakota 20 handheld GPS devices, the latest must-have tool for exploring the great outdoors.
Even in the most complex applications, Explorer paper provides first-rate results, in both printing quality and performance, especially in documents with intensive colour use, making for more effective communication and a guaranteed impact on readers. Users can enjoy a multi-purpose paper product with excellent opacity, whiteness and softness, making it the right choice for top-level documents.
The Explorer range is offered today in four grammages - 80 g/m2; 90 g/m2; 100 g/m2 e 110 g/m2 -, allowing for different printing solutions. It also offers a product which combines 30% recycled fibres with high quality virgin fibres (Eucalyptus globulus), Explorer iCare. The range also includes two products for the printing industry, Explorer Premium Offset and Explorer Premium Preprint, available in different grammages and formats, all with the same high standards of quality.
Highlights in 2011 • The brand’s first worldwide promotion aimed at end users, in which it gave away 100 Garmin Dakota 20 handheld GPS devices • Expansion of brand distribution into new markets, with sales now going to 32 countries • 27% growth in volume sold www.explorer-paper.com
Consolidated Annual Report 2011 35
Pulp
As in 2010, the market for bleached eucalyptus pulp (BEKP) went through two distinct phases in 2011. After a widespread reduction in prices during the 2nd half of 2010, the market held steady for the entire first half of 2011, allowing for a hike in the PIX index to USD 880 /ton at the start of the 2nd quarter.
Two factors - demand for pulp from the Chinese market, still one of the main drivers of the world market, and the evolving exchange rate, with the currencies of the main producer countries, and the Brazilian real in particular, rising against the dollar – combined to sustain the market and USD pulp prices.
This situation changed significantly during the second half of the year, as market conditions deteriorated, with a slowdown in demand and successive drops in prices. A number of factors contributed to this situation, chief amongst which was the worsening of the economic climate in Euro Zone countries, an important paper market, leading to a drop in demand for paper, as well as a significant degree of instability on the foreign exchanges.
Monthly PIX – BHKP prices per ton (Eucalyptus / Birch)
1000
900 PIX USD 800
700
600 PIX € 500
400
300
200 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Other factors disrupting the pulp market included the growing mismatch between supply and demand caused partly by increased supply, due to the arrival on the market of additional pulp, and also by falling demand from the paper sector and the slowdown in June and July in demand for pulp from the Chinese market, although this was corrected over the course of the 2nd half, and especially in the 4th quarter, allowing 2011 to set a new record for Chinese pulp imports.
Consolidated Annual Report 2011 36
As a result of this deterioration in the market, total stocks at manufacturers and European ports increased during 2011, ending the year at higher levels than at year-end 2010. However, attention should be drawn to very positive evolution, in December, in stocks at short fibre producers, which ended the year down on the previous year, and even down on the monthly average for the last 15 years.
Performance
Production of bleached eucalyptus grew by more than 5% on the previous year. However, as expected, the level of integration within the company has increased after the start-up of the new paper machine in Setúbal, leaving less pulp available for sale on the market, meaning that sales were down by 3% on the previous year.
In terms of sales by paper segments, the Group continues to gear its output to use in segments with greater value added (special papers), which represented the majority of sales, accounting for approximately 60% for the year as a whole.
As in previous years, nearly all pulp sales were made on the European markets which are home to producers of better quality paper at the forefront of technological and environmental developments. These are the manufacturers which best appreciate the inherent qualities of the eucalyptus globulus pulp produced at the Group’s mills.
Logistics
The logistical operations carried out by the Portucel Group involved handling 4.8 million tons of inbound goods and 2.4 million tons of outbound goods, as well as 1.8 million tons of primary transport and 0.6 million tons in secondary transport.
The Group sold to 115 countries 2011, placing its products in more than 4,300 locations around the world.
Maritime shipping continued to be the Group’s prime commitment in this area, accounting in 2011 for 58% of primary logistics. As a result, the Group represented 9% of all containerized and conventional cargo exported through Portuguese ports.
Consolidated Annual Report 2011 37
4. Industrial Operations
Industrial Operations
The industrial units operated by the Portucel Group once again recorded excellent performance, with significant gains in pulp and paper output as the main plants broke their previous records.
By working at full capacity with the added benefit of extremely high levels of efficiency, the Group achieved an increase in output of printing and writing paper of some 7% in relation to the previous year.
It should be noted that the growth in paper output was matched by a significant increase in pulp production, which ended the period up 5.4% on the previous year.
In its second full year of operation, the new Setúbal Paper Mill increased its output by approximately 18% in relation to 2010.
The remarkable performance recorded by the Group’s industrial assets can be ascribed to its policy of capital projects, most notably the new paper mill in Setúbal which, in this second full year of operation, reached output levels very close to its rated capacity.
Special mention should be made of the efficiency levels obtained at the Group’s industrial units, which constitute an international benchmark for the sector. These levels made it possible to assure significant stability of production, with a natural knock-on effect on product quality and efficient use of natural resources.
In terms of pulp output, we should draw attention to the Figueira da Foz and Setúbal mills which set new records, whilst the Cacia Mill also achieved excellent performance thanks to an improvement in production efficiency.
High levels of paper output led to growing integration of the Group’s industrial units and means that only part of the pulp output of the Cacia Mill is available for sale on the market, significantly reducing the Group’s exposure to this type of product.
Attention should also be drawn to the quality of the paper produced. The standard of excellence achieved means that the Group’s product portfolio is regarded as an international benchmark for quality in this market segment.
Consolidated Annual Report 2011 38
In the pulp sector, all three mills recorded positive performance, finding ways to offset the increase purchase cost of timber, chemicals and fuel, by boosting energy efficiency and cutting specific consumption of certain chemicals and raw materials representing a larger share of production costs.
In paper production, the Group achieved a sustainable reduction in variable production costs across all its units, essentially due to the cost of virgin fibre, complemented by good performance in terms of consumption of chemicals and energy which, as a whole, was enough to offset the increase in purchase costs.
The Group’s excellent energy performance made an important contribution to cutting production costs at all its units. This can be attributed in particular to the biomass and natural gas cogeneration plants, to a significant reduction in fuel oil consumption and to the intensive use of biomass.
The Group’s industrial maintenance activities are essential for maintaining the highest levels of availability at its plants and proceeded in accordance with the pre-set parameters. This work is carried out by the Group’s own maintenance company (EMA 21), responsible for all maintenance operations at the mills and power stations.
A project was launched at the end of the year to improve further the efficiency of energy use at the Group’s main industrial units.
The LEAN project proceeded in 2011 with activities at all plants, aimed essentially at improving production and maintenance operations. The results achieved by the end of the year could be quantified in what amount to materially relevant accrued gains.
Capital Expenditure Projects
After a period of very heavy investment in increasing production capacity for paper and energy, the Group channelled its capital expenditure this year into troubleshooting its plants and projects, allowing it to improve its competitive position, cut costs and increase efficiency.
Special attention was paid in 2011 to investment projects designed to replace end-of-life equipment and to carry out major repairs, essential for sustainable operation of the Group’s plants, and to improving safety conditions at timber yards and industrial facilities.
Projects making a significant contribution to industrial efficiency included the contract awarded for increased evaporation capacity at the Figueira da Foz Industrial Complex, due to come on line in 2012, and the project to replace the furnace and superheaters for the biomass boiler at the Setúbal Industrial Complex.
Consolidated Annual Report 2011 39
In the energy field, mention should be made of the project to install fixed biomass shredders, to serve the biomass power stations in Cacia and Setúbal. The shredders started up in the 1st quarter, leading to significant savings in the cost of biomass acquired.
The Cacia mill connected its turbo-generator no. 1 to the electrical network, thereby optimizing its energy efficiency.
Another important investment project was the work on PM1 at the Setúbal Paper Mill, with a view to production of recycled papers at this facility.
Consolidated Annual Report 2011 40
5. Resources and Supporting Functions
Sustainability
A firm commitment to sustainability issues continued to be imperative in all aspects of Portucel Group operations in 2011, from the forests through to the products it manufactures and markets, in keeping with the sustainability policy approved and adopted since 2005.
This commitment is the natural consequence of a growing perception, at every level in the Company, that sustainable practices are socially correct, environmentally essential and indeed economically advantageous.
Thanks to the opportunity to share experiences and learn from others offered by its membership of the WBCSD – World Business Council for Sustainable Development, the Portucel Group has been able to position itself at the forefront of developments in this field in the Portuguese pulp and paper industry.
This leadership position – and the alliance with its two fellow Portuguese members of the WBCSD in 2001 – offered the opportunity to set up BCSD Portugal (as a regional arm of the wider World Council) which the Portucel Group currently chairs, and to pass on the sustainable principles and practices which will have to guide the course of companies as they look to the future.
Proof of the success of this enterprise is offered by the fact that BSCD Portugal has a membership of more than one hundred and thirty of the country’s largest companies and conglomerates, with combined turnover in excess of 75 billion euros, and the fact that Portugal today, in the words of the Executive Chairman of the WBCSD, “is the country best represented on the WBCSD, in proportion to the size of its economy.”
The Portucel Group is accordingly proud of the important role it has played throughout this process.
In this context, special attention was paid in 2011 to internalizing the principles of good forestry management contained in the Code of Good Forestry Practice drawn up by the Group and published in 2010, in order to assure that woodlands management practices are implemented across the Group’s holdings on a daily basis in line with the certification of forest management under the FSC and PEFC systems.
In view of the importance of the forestry sector to the Portuguese economy, and as the country’s largest forest landowner and manager, the Group regards its woodlands as one of the most important
Consolidated Annual Report 2011 41
pillars for the sustainability of its operations, and works constantly to assure that its plantations and agro-forestry holdings are managed in an efficient, competitive and responsible manner.
The Portucel Group’s forestry policy clearly defines and sets out its approach to managing and protecting woodlands, seeking to help its employees and suppliers to adopt the best practice in these fields, which it proactively disseminates, through long-term engagement with other organizations in the forestry sector, with a view to improving the performance, competitiveness and sustainability of the forestry sector.
Portugal’s woodlands are almost wholly made up of plantations, and the plantations of Eucalyptus Globulus, which represent the majority of the Group’s forestry holdings, have attracted special attention from technical experts, environmental NGOs and the general public. In view of this, the Portucel Group organized an international conference on this subject in 2011, providing an opportunity to look more deeply into the balance – both possible and necessary – between the economy, the environment and the social good. This was the event with the highest media profile in Portugal marking the International Year of Forests, attracting interest both at home and abroad, and mobilizing some four hundred participants.
Forest certification and biodiversity are other issues of relevance to woodlands management which have continued to receive special attention from the Group, which further expanded the range of its efforts to defend and add to the value of Portugal’s forests, in particular through cooperation agreements signed with federations of forestry producers.
In the specific case of eucalyptus, the Group has continued to press ahead with R&D work through RAIZ and has also made preliminary contacts with universities with a view to research into the conditions for regeneration and multiplication of the species, in the context of existing conditions and those which might result from climate change, taking the maritime pine (Pinus pinaster), the most abundant woodlands species in Portugal, as the point of comparison.
The Portucel Group has also been invited to lead the Forest Resources Action Team, a subgroup looking into the issue of the sustainability of forest resources, as part of the Sustainable Forest Products Industry (SFPI) project of the World Business Council for Sustainable Development (WBCSD).
In the field of production processes, the concern for sustainability was most clearly expressed in efforts to reduce environmental impacts and to improve working and safety conditions (as detailed in the Sustainability Report).
These initiatives led naturally to increased eco-efficiency in the Group’s paper products, as it consolidated growth in the low grammage ranges (between 75 and 70 g/m2) manufactured and sold.
Consolidated Annual Report 2011 42
The Group’s Code of Ethics also came into effect in 2011, designed to offer a clear guide to the long- standing principles and procedures in force in its companies and to provide an ethical framework for the activities of all employees and officers, from the shop floor to the boardroom.
Issues relating to training and professional development once again received careful attention from the Group, which undertook a review of its performance assessment system, covering all staff, as well as perfecting the career development process. Both of these are tools focussed on identifying personal and corporate objectives. Improvements were also made in the field of health and safety, reflected in results which amount to clear progress in relation to previous years.
For the Portucel Group, prosperity and growth are goals which go hand in hand with progress and better living standards in the community, especially in the local areas around its production facilities.
In order to provide information about the Company and its principal achievements, the Group has undertaken a number of initiatives involving the national and local media, aimed at raising awareness in the local community and public opinion of the importance of its operations to the country as a whole and to the specific regions, at the same time as gaining publicity for the main economic, social and environmental issues associated with the forestry sector.
Taking its cue from the environmental-friendly nature of paper and other related forest-based industries, the Group has pursued a large number of initiatives based on the concept of “Paper in a forest of urban myths”. From plantations to recycling, and from industrial practices to the use of IT, the Group has taken its “sustainability story” to schools, companies and stakeholders.
Under its policy of social responsibility, the Group continued in 2011 to pursue and support educational, welfare and humanitarian projects, devoting a significant share of its support to educational work,
In view of its social importance in the hard economic times currently being experienced in Portugal, special mention should be made of the “Social Project” run by the Group, supporting needy families by proving basic foodstuffs, in the areas around its industrial plants.
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FORESTRY
Sustainable Management
The financial year of 2011 represented a further milestone in the reorganization of the Portucel Group’s forestry operations, in particular with the specialization of land and forestry assets, with the goal of standardizing processes and the management model. The company Portucel Soporcel Florestal now operates as the Group’s public face in the Portuguese forestry sector.
At year-end 2011, the Group had approximately 120 thousand hectares of woodland assets under its management, divided into 1415 management units, spread between 158 Portuguese municipalities.
Work continued during the year on the careful selection of forestry assets, with a view to increased and sustainable yields, in addition to operations designed to improve soil fertility in line with best environmental practice.
Figures for forestry operations in the 2011 season point to levels of activity not witnessed for many years, reflecting the Group’s firm commitment to increasing and improving the productivity of its woodland holdings.
Forestry operations to conserve and improve eucalyptus plantations involved routine maintenance work on 24 500 hectares (including 10 600 hectares of undergrowth clearance and 10 125 hectares of shoot selection), special maintenance work on a further 14 054 hectares (fertilization) and as well as maintenance work on 5 374 kilometres of paths and fire breaks.
Value is attached to efficient management of diversity in the Group’s agro-forestry holdings, resulting in significant output of cork, wine, and pine timber for various uses, game and pasture, as well as other products.
Viveiros Aliança – the Portucel Group’s nursery operator – produced approximately 7.4 million plants in 2011, of which around 1 million were indigenous or protected species and 100 thousand ornamental plants or shrubs.
At the same time, work proceeded on expansion of the Group’s nurseries at the Espirra Estate, which will allow the Group to boast the largest and most up-to-date woodland nurseries in Europe, to match its positioning as global benchmark for efficiency and technological innovation in this field.
The new unit will produce 12 million plants each year and is designed to respond to market demand for certified Eucalyptus globulus clones, in addition to supporting the Group’s own forestation
Consolidated Annual Report 2011 44
activities. This capital project is yet further evidence of the Group’s systematic commitment to contributing to real improvements in the Portuguese forestry sector.
Forest certification and biodiversity management
The Portucel Group maintained in 2011 the certifications obtained in previous years, under the two forest certification schemes most widely recognized internationally: the FSC (Forest Stewardship Council) and the PEFC (Programme for the Endorsement of Forest Certification schemes). The Group’s certified holdings include all its woodlands in mainland Portugal, representing a substantial proportion of all certified forests in Portugal (61% under the FSC scheme and 54% under the PEFC)3. These certifications encompass a range of products, from eucalyptus timber for pulp and paper manufacture (the Group’s main output) through to cork (FSC and PEFC) and pine timber and pine cones (PEFC).
As landowner and estate manager, the Group has pursued a strategy of adopting best practice in forest planning and management and conducting its operations in keeping with a set of rules on responsible management, set out in its Forestry Code of Conduct. The certifications obtained bear witness to the Group’s stance on this issue, and to its commitment to managing its woodlands assets so as to pursue yields by means of an integrated approach which embraces environmental, social and economic concerns. For the Portucel Group, forest certification is means of strengthening its presence on an international market which makes increasing demands as to the sourcing of raw materials, and an opportunity to respond to the legitimate concerns of society.
The Group has invested since 2007 in cooperation agreements with the leading organizations in this sector, with a view to furthering the cause of forest certification.
In 2011, this involved a series of training and awareness raising activities aimed at landowners and the technical staff of forestry associations, as well as sponsorship and participation in programmes related to certification. The Group has sought to help landowners and timber producers and hauliers, as well as other service providers, to adopt good practice as followed by its own companies, whilst offering a pioneering cash premium for suppliers of certified timbers. This scheme was highlighted in 2011 as a case study of international interest, in the report entitled “Celebrating Success: Stories of FSC® Certification”, launched at the 6th General Assembly of the Forest Stewardship Council, following up the reference to Portugal made in “Forest Products 2007/2008” issued by the FAO (Food and Agriculture Organization) in relation to the same initiative.
The Group continued in 2011 to represent the Portuguese paper industry on the Certification Issue Group of CEPI (Confederation of European Paper Industries) and to make its contribution to the
3 Source: Official statistics from FSC International and PEFC Portugal (available on January 2011)
Consolidated Annual Report 2011 45
Policy and Standards Committee (PSC) of the FSC, as representative of the northern economic sub- chamber.
Since an early point in its history, the Portucel Group has understood the need to take an innovative approach to forestry management, so as to conserve the natural assets of its woodland holdings. This vision gave rise to a strategy based on assessment of wildlife and biodiversity (species and habitats), the mapping of areas of conservation value, assessment of the potential impacts of operations and design and implementation of measures to mitigate these effects through Conservation Action Plans and monitoring programs.
This work has been integrated into the Group’s forestry management model and applied systematically to different forestry activities, contributing to recognition of responsible management in the form of forest certification. Improved environmental reporting on forestry issues, combined with the Group’s efforts to raise awareness and share experiences through a range of projects and community schemes, has been welcomed by the Group’s stakeholders in the light of the results achieved.
In addition to processes related to management of its own assets, the Group has sought to add to our knowledge of biodiversity and to programmes designed to halt losses in this area, through a series of conservation campaigns, at home and abroad, reflecting its conviction that these are the greatest challenges faced by society today. Special attention may be drawn to the Group’s partnerships with leading environmental NGOs in Portugal and worldwide, which have lasted for several years.
At the same time, the Group pursued a policy in 2011 of active media engagement, dealing not only with the issue of forest certification but also with the conservation of biodiversity. In addition to its contributions to a number of seminars and conferences, the Group has been eager to collaborate with higher education establishments, especially in the field of forestry engineering (through study visits to units under its management, training courses and seminars for MA programmes), as well as featuring itself in case studies disseminated in a series of publications and on television.
Forest Fire Prevention
Defence of Portugal’s woodlands, through systematic programmes to prevent and combat wildfires, remains one of the Portucel Group’s central priorities. In 2011, the Group stepped up its investment in this area, focussing in particular on prevention, training and research and development. Overall, this investment amounted to approximately 3.2 million euros.
The Group’s strategy in managing fire risk is geared primarily to reducing the likelihood of fire events, as well as minimizing exposure and mitigating risks, all of which is achieved by means of a series of
Consolidated Annual Report 2011 46
tools for overseeing and controlling operations over approximately 120 thousand hectares. This is a year-round task, involving strong links with the institutions making up the national wildfire defence system (the National Forestry Authority, the Institute of Nature Conservation and Biodiversity, the civil defence and police authorities, the fire service, local authorities and organizations of forest landowners, amongst others) and with a research and development network in Portugal and abroad. The Group’s contribution includes the largest private budget allocation to forestry protection in Portugal as well as efforts to promote the design of more balanced public and private policies. In doing this, the Group has sought to set an example and play a full part in the professional management of Portugal’s woodlands, contributing to the creation of more efficient national system for combating fires.
The Group’s involvement in defending Portugal’s forests entered a new phase in 2011 with its committed participation in a research and development project organized under the MIT Portugal programme, in conjunction with the Massachusetts Institute of Technology and three Portuguese universities. Over the next three years, the FIRE-ENGINE project – Flexible Design of Forest Fire Management Systems (http://www.mitportugal.org/research-overview/research.html) is expected to make technical and scientific contributions to the design of forest protection solutions (prevention and combat) and of decision-making models which explicitly take into account the economic efficiency of the various fire risk management alternatives.
In operational terms, the Group was directly involved in 2011 in work to raise public awareness in high risk areas, as well as sitting on more than 35 municipal forest fire defence committees and assuring that 25 weather risk information boards were kept permanently up to date during the summer. By the start of the critical period for fires, maintenance work was carried out on water points and, as mentioned before, on some 5 400 km of paths and fire breaks, in addition to the treatment of forest fuel in a further 11 thousand hectares, using a variety of techniques such as cutting back undergrowth, controlled burning, application of herbicides, pruning and thinning.
In order to mitigate the fire risk during the period from June to October, the Group continued to collaborate with the national fire-fighting system. Acting through Afocelca (the industry organization in which the Group is majority shareholder), it mobilized more than 300 people, including 70 Company employees, in an operation which involved 6 watchtowers, 35 rapid response units, 16 semi-heavy units and 4 helicopters. As a result of these efforts, 2011 was the third best year of the last decade for the Portucel Group and the fifth year running with losses of less than 0.8%. The total area burned was 312 hectares, of which 220 consisted of eucalyptus plantations, with negligible impact on the forested area of other stands (0.3%), most consisting of scrubland.
Consolidated Annual Report 2011 47
CO2 Retention in Forests
The accrued CO2 (carbon dioxide) retained by the Portucel Group’s woodlands at year-end 2011 was estimated at 7 110 061 tons, some 13 times greater than the CO2 emission licenses granted to the Group (for 531 049 tons).
Comparing forestry stock between year-end 2011 and year-end 2010, converted into CO2, we can point to an increase of 115 thousand tons in CO2 retention, due above all to successive reinstatement of production potential by the inclusion of new areas with increased volume.
Procurement
Timber suppliers
As in recent years, supply in the Portuguese eucalyptus timber market fell far short of the demand from industrial facilities, despite a slight tendency towards recovery, in terms of increased supply, confirming the Portucel Group’s forecasts.
In 2011, the Portuguese market experienced growth in supply. Increased timber purchases on the Iberian market made it possible to reduce imports from markets such as Africa and South America, although these still remained extremely high.
In the pursuit of its policy of corporate responsibility and engagement with its local communities, the Group remained strongly committed to certification of forest management and certification of the chain of custody, as means of assuring sustained business development.
Of the certified timber supplied to the Group’s mills, 51% was sourced from outside the Iberian Peninsula. All other purchases were of controlled origin timber.
International timber market and trade
The woodchip market in Europe, and especially in the Iberian Peninsula, has undergone significant development in recent years, as reflected in growing quantities shipped around the world, despite rising oil costs.
In 2011, in view of predictions of a continued shortfall in the supply of timber materials on the Iberian market, the Group had recourse to the international market, using woodship carriers sailing from Latin America.
Consolidated Annual Report 2011 48
In respect of its eucalyptus purchases on the international market, the Portucel Group has been particularly concerned to assure that all its environmental, social and economic standards are duly complied with, and in 2011 purchased timber exclusively from FSC certified plantations. Eucalyptus imports from outside the Iberian Peninsula comprised more than 90% Eucalyptus globulus, which is the dominant species in Portugal.
Lease and acquisition of forest land
Efforts continued to expand the woodlands under the management of the Portucel Group, with more interesting results than in previous years,
This reflects the dynamic generated by the reorganization of the Group’s commercial team, which has been incorporated into a larger team with a broad commercial expertise in the supply market, allowing for increased engagement with the different players in this sector.
Forestry logistics and transport
The Portucel Group’s forestry logistics and transport operations accounted in 2011 for more than 50% of logistical flows of timber arriving at its three mills.
Over the course of the year, a number of its road haulage yards were relocated, to port or railway yards, in areas further from the Group’s industrial units (in particular in Galicia). This measure was designed to cut pollution levels and costs associated with haulage, substantially reducing mileage in timber transportation by road.
Although these changes were made when the financial year was already underway, it was still possible to improve the maritime, rail and road mix of the timber imported from timber yards located in Galicia.
PURCHASING
In terms of the procurement of non-timber raw materials for the normal supply of the Group’s production units, the financial year of 2011 was marked by the worsening of the economic crisis in Europe and by problems at production units in the chemicals industry, causing missed deliveries of products, due to lengthy technical breakdowns caused by a reduction in investment and the cutting of maintenance costs. Mention should also be made of the tendency of the European chemicals industry connected to cellulose pulp and paper to move to regions where investment is forecasted, such as South America and East Asia, and its rapid relocation to Brazil, India and China.
Consolidated Annual Report 2011 49
As regards needs, activities in 2011 were geared largely to consolidating production at the new Setúbal Paper Mill, leading to an increase in the overall volume of purchasing for the Group’s paper mills. This extra volume of purchasing can constitute an advantage or a risk, depending on the performance of supply on the market.
Prices for various products tended to be high, due to the strong pressure on suppliers to improve their margins.
It is unfortunate that the national supply base continues to fail to meet the needs of the Portucel Group, due to the lack of investment in complementary industrial areas, which could benefit from the stable market offered by the Group.
In order to counteract future risks, the Portucel Group has sought to adjust to the new situation, making efforts on a number of fronts:
o A continued policy of supplier diversification, seeking alternatives in other regions of the world or in different industrial sectors, not traditional connected with the pulp and paper industry (in particular the Far East), to allow the Group to balance out the reduction in supply from local suppliers whilst optimizing its purchasing costs for certain raw materials; o Ongoing improvements to logistics (especially in maritime shipping), in order to cut supply costs; o To step up and improve the use of cost calculations and the TCO (Total Cost of Ownership) model, as a means of improving the decision-making process in purchasing.
Consolidated Annual Report 2011 50
ENVIRONMENT
Environmental performance
Despite growing output of cellulose pulp, year after year, and expansion of paper output corresponding to approximately 45% over the last 5 years, indicators of environmental performance reflected positive and sustained results at all production facilities, in all fields: air, water, waste and natural resources.
These results have been achieved thanks to systematic efforts on the part of the Portucel Group to identify, monitor and control the environmental aspects of its operations, seeking to eliminate or minimize its impact, through implementation of practices based on strict compliance with legislation, principles of ongoing improvement and the use of Best Available Techniques (BATs).
Particularly significant reductions were achieved in water intake volumes, alongside improvements in sustained use of energy from renewable sources.
Consumption of Natural Resources Reference - 2007
110
100
90
80
Evolution, % 70
60
50 2007 2008 2009 2010 2011
Renew able Energy, GJ w ithdraw n Water, m3/t product
Consolidated Annual Report 2011 51
Energy consumption by source - 2011 5%
26%
69%
Biomass Natural gaz Fuel oil
Significant reductions have been achieved in gas emissions over the last five years, especially in the case of emissions of SO2 and NOx particles, thanks to investment in improved processes, starting in 2009, and in particular in converting the biomass boiler at the Cacia plant to fluidized bet technology and optimizing the environmental performance of the biomass boiler at the Setúbal plant.
Consolidated Annual Report 2011 52
With the start-up of the new Paper Mill in Setúbal in 2009 and the resulting increase in paper production capacity of approximately 50%, CO2 rose in relation to the reference year (2007), due to the commissioning of a new natural gas combined heat and power plant.
However, the optimization of processes, involving a reduction in consumption of fossil fuels in the
Group’s other activities, meant that 2011 saw an overall reduction of approximately 7% in CO2 emissions per ton of product, in relation to 2010.
With regard to emissions in water, the indicators for environmental performance point to reductions over the last five years of approximately 40% for suspended solids and around 60% for biodegradable organic matter, thanks to implementation of improvements to processes.
Effluents Reference - 2007
110
100
90
80
70
60 Evolution, % 50
40
30 2007 2008 2009 2010 2011
TSS, kg/t product BOD5, kg O2/t product COD, kg O2/t product Effluent, m3/t product
The Portucel Group’s operations generate residues of different types, which are delivered to licensed waste management operators. Waste resulting directly from pulp and paper production accounts for more than 90% of total residues, and these are classified as non-hazardous under the European List of Wastes (ELW).
In this field, the Portucel Group continues to invest in improving production processes, with the prime aims of cutting waste production and increasing reclamation. The Company has pursued R&D projects in partnership with RAIZ and potential waste users, promoting the use of waste products as
Consolidated Annual Report 2011 53
raw materials in other processes. Of all the process waste produced, around 83% is sent for reuse, through licensed operators.
In 2011, in order to assure effective management of all information relating to the waste circuit (production, conditioning, transport and destination) and to standardize operational and reporting practices at all Group facilities, improvements were made to the management system using tailor made software.
The Group had already been licensed, in 2010, to use the European Union Ecolabel on the paper it manufactures and markets, in the office stationery and printing segments (License PT/11/002, valid through to the end of June 2012), and work has already started on the application for renewal. For paper of these types, the criteria defined in the EC Decision regulating the use of the Ecolabel are designed to improve environmental performance, and also to apply sustainable management principles in order to protect forests.
The criteria for environmental performance defined and used were developed through scientific studies and wide-ranging consultation under the aegis of the European Union Ecolabel Committee, comprising the competent authorities from the Member States, representatives of environmental NGOs, industrial and consumers’ associations, unions, and small and medium sized companies.
The label constitutes external and independent endorsement of the Portucel Group’s products, validating its efforts to minimize the environment impacts of its production processes. It also serves as an efficient means for engaging with clients, by offering transparent evidence of the commitments accepted by the Group in its Sustainability Process.
The Portucel Group was also actively involved in 2011 in monitoring and trials for the “Single Report” project, instituted by Article 28 of Decree-Law 173/2008, of 26 August. This project is being undertaken by the SIRAPA Platform (Integrated Registry System of the Portuguese Environmental Agency) with the aim of developing software for integrated collection of environmental data as part of moves to simplify dealings between the administrative authorities and citizens and companies, and to facilitate the reporting of environmental data by industrial concerns.
The Single Report (SR) is designed to contain the environmental information required under the legal rules for the EU Emissions Trading Scheme (EU ETS), the European Pollutant Emissions Register (EPER) and Integrated Pollution Prevention and Control (IPPC).
In 2011, the Portuguese Environment Agency released the 1st module of the Single Report – SIRAPA Inventory, designed to characterize each IPPC/EPER establishment with information in a standardized format, allowing for preliminary filling out of the EPER form. At the end of the year, this module was submitted by plants to the relevant authority, reporting operational data and environmental performance data for the establishments in relation to 2010.
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In the field of IPPC, work continued on the application for renewal of the Environmental License for the Figueira da Foz Industrial Complex, and the new Environmental License is expected to be issued in early 2012.
Management Systems
As envisaged in the Portucel Group’s annual audit plan, external audits were conducted in 2011 in order to assure the pursuit of the aims set out in the Management Systems policy. Over the course of the year, work proceeded on renewing the FSC and PEFC Chain of Responsibility systems for the Group’s multisite, the Environmental and Quality Management Systems for the Cacia Mill, the Quality and Safety Management Systems for the Setúbal Industrial Complex and the Safety Management System for the Figueira da Foz Industrial Complex. Certifications were also maintained in respect of all other standards implemented and certified.
SETÚBAL FIGUEIRA FOZ INDUSTRIAL Bosques Sopor CACIA INDUSTRIAL COMPLEX do MILL PortucelSoporcel PortucelSoporcel PortucelSoporc cel Pulp COMPLEX (PORTUCEL AND Atlântico Wood Supply Florestal el Fine Paper ATF)
Quality ISO 9001
Environment ISO 14001
OHSAS 18001 Certifications Safety NP 4397
FSC-STD-40-003 FSC-STD-40-004 Chain of FSC-STD-40-005 Custody PEFC ST 2002:2010 PEFC ST 2001:2008
Accreditation Laboratory ISO/IEC 17025
The risk analysis proposed by FSC Portugal for the chain of responsibility was approved by FSC International in March 2011. This makes Portugal a low-risk country for the five risk categories envisaged in the controlled wood standard.
Seven new sites were added during 2011, four of which are timber yards, meaning that the Portucel group’s multisite now comprises 28 individual sites.
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The chain of responsibility rules and rules on use of the PEFC and FSC brands were revised from 2010 to 2011. In order to assure compliance with the new regulatory requirements, the relevant procedures were reviewed, and the main changes involved new requirements in the fields of health and safety at work and supplier and customer communications, as well as a new method for calculating certified output.
These changes, combined with the reorganization of Group companies, required adaptations to be made to the credit management information systems, in order to assure the traceability of certified fibrous material.
In 2011, certified timber supplied to the Group’s mills accounted for more than 30% of total supplies, sourced from Portugal, Spain and South America.
All the long fibre and recycled fibre pulp was purchased in compliance with the FSC and PEFC criteria and requirements, in the form of certified products or FSC Controlled Wood.
Sales of certified paper increased by 8% in relation to 2010, with the greatest impact in FSC products.
As part of continuing efforts to improvement management systems in the Portucel Group, the financial year of 2011 saw the implementation of the LEAN Project, with a philosophy based on the concept of lean manufacturing. This project seeks to achieve the following aims;
o Ongoing improvement of production processes, by consolidating and optimizing efforts to cut waste production in activities adding no value; o To reduce the variability of processes; o Improved information systems to support management and operational decision making; o To cut costs in operational areas, in respect of processes, equipment and people; o To spend less resources on operations of little benefit; o To optimize stocks of consumables; o To optimize purchasing processes and procedures.
In addition to the specific measures envisaged for each plant, the LEAN project will also seek to consolidate and carry further the measures developed and implemented in previous projects, with a view to ongoing improvements.
Significant strides were also made in 2011 in the process of developing procedures designed to standardize practices at all the industrial facilities operated by the Portucel Group.
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Energy
In 2011 the Portucel Group achieved an increase in gross power generation of 11.2% in relation to the previous year. This represented consolidation of the various capex projects in the power generation sector, with total power generation corresponding to almost 4% of all electricity produced in Portugal.
Not including cogeneration by SOPORGEN (partnership with EDP)
Of the total power generated by the Group, 65% was obtained from cogeneration and biomass power plants using renewable fuels (forest biomass and wood by-products resulting from the pulp production process).
Attention should be drawn to the high level of energy efficiency of all the Portucel Group’s cogeneration facilities, in line with the Community Directive encouraging Member States to promote cogeneration – combined heat and power generation – as a means of saving primary energy, reducing grid losses and cutting emissions of greenhouse gases, rather than conventional power stations which offer substantially lower yields without making use of the heat produced.
Power generation from biomass was up by 11.1 % on the previous year.
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The two new biomass-fuelled power stations, dedicated solely to power generation, increased their contribution thanks to excellent levels of stability and performance in operation and maintenance, despite high levels of humidity and inerts content and irregularities in the waste biomass purchased,
At the new combined cycle natural gas cogeneration plant in Setúbal, a number of changes were made to mechanical components in the natural gas turbines, constraining the power output.
The Portucel Group remains Portugal’s leading producer of electricity from biomass, accounting in 2011 for an estimated 51.6% of the total power produced from this natural resource.
Bioenergy and Fossil Fuels
From 2010 to 2011, the Portucel achieved a 2.3% reduction in emissions of CO2 (carbon dioxide) covered by the ETS – Emissions Trading System, despite growing energy needs due to an increase in the Group’s paper output of around 50%, as a result of the start-up of the new paper mill and the associated combined-cycle natural gas cogeneration plant. The significant reductions in emissions achieved through the use of units powered almost exclusively by biomass outweighed the increase in units using natural gas, due to increases in paper output. Natural gas is a fossil fuel with lower carbon content, in comparison with other fossil fuels, making it a more sustainable energy source for this type of fuel, with less impact in terms of greenhouse gas emissions.
We should note that, even taking the facilities in operation in 2008, prior to the start-up of the new capacity created by recent capex projects, the Portucel Group cuts its CO2 emissions by 15.1% in 2011, thanks to heavy investment in this area.
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The main capex projects in recent years contributing to a reduction in CO2 emissions by the Group were the fitting of new recovery boilers in Cacia and Figueira da Foz, the conversion of biomass boilers to fluidized bet technology at the three industrial complexes and changes to the lime kiln at the Figueira da Foz complex.
The two biomass power stations in Cacia and Setúbal have allowed the Group to consolidate its leadership of the Portuguese biomass energy market. The great benefit in terms of avoided CO2 emissions will have an impact on the national balance for these emissions and will reduce the country’s dependence on imported fossil fuels, a national aspiration which the Group is accordingly helping to achieve. It is estimated that these two power stations will avoid CO2 emissions in excess of 70 thousand tons on the national balance sheet.
The investment in the new steam turbogenerator at the biomass cogeneration plant at the Figueira da Foz industrial complex, replacing two old steam turbogenerators will allow for a considerable improvement in the energy efficiency of this facility, resulting in an increase in power generation in relation to the average figures for 2007, 2008 and 2009. Although this project has no impact on the
Group’s CO2 emissions, considering that it improves efficiency in what was already the use of biomass, it will indirectly allow for a reduction in CO2 emissions of approximately 43 thousand tons for the country (it avoids the generation of electricity at major gas- and/or coal-fired power stations).
Forest Biomass for Energy Purposes
The Portucel Group has strengthened its position as a producer and supplier of forest biomass and timber by-products.
Integrated forestry operations, in keeping with sustainable principles and the concern to preserve biodiversity, are in the Group’s view the fundamental basis for a balance in obtaining raw materials for the production of tradable goods with a high level of value added, such as pulp and paper, and for making use of off-cuts and other residual biomass for producing energy.
The Group has continued to supply its biomass reception centres, including those located at its plants, seeking to optimize further the operation of the chipping equipment used to process the biomass as well as the logistics involved in biomass operations.
Human Resources
At year-end 2011 the Group had a workforce of 2,290 employees, including 2,236 on permanent contracts.
Consolidated Annual Report 2011 59
The Portucel Group remained committed to ongoing training and professional development throughout 2011, providing a total of 129,122 training hours in 1,739 training initiatives, involving 2,186 trainees. Special attention has been paid to training in health and safety at work, which accounted for 24,567 training hours, or 19% of total training.
Employees were encouraged during 2011 to make use of the Employees’ Portal, operated under the SAP-RH system. Staff can use this system to optimize communications, in particular with regard to time sheets and salary processing.
The absenteeism rate stood at 3.5% in 2011. Approximately 2.1% of this rate corresponds to sick leave.
Social Responsibility
In 2011 the Portucel Group stepped up its welfare support for the underprivileged in its local communities, whilst also committing resources to schemes to improve the woodland environment and conserve biodiversity.
The Group continued to pursue a policy of social responsibility by supporting a wide range of institutions working in the regions around its plants and forest holdings. Special mention should be made of the following projects:
• Social Project – Cooperation agreements were signed in 2011 with Portuguese charities working the areas around the Group’s plants: Cáritas in Setúbal, the Red Cross in Figueira da Foz and Cáritas in Aveiro. This project consists of providing foodstuffs for families directly hit by the serious social crisis affecting Portugal and the whole world.
• “Give a hand to Nature” project – as part of the celebrations for World Forests Day, the Group organized educational activities at the Espirra Estate, involving some 170 primary school children from the regions around its plants. The project was designed to raise the young people’s awareness of the need to protect woodlands and conserve the environment.
• “Give a hand to the Forest” project – The aim of this project was to raise awareness amongst urban populations close to our plants and forest holdings of the importance of caring for forests and preserving natural resources. This involved giving away some 2,500 plants characteristics of the Aveiro, Figueira da Foz, Setúbal, Chamusca and Redondo regions.
Consolidated Annual Report 2011 60
• “Smarten Up Setúbal” project – This project was organized by the Setúbal Municipal Council with support from the Portucel Group in the form of donations of saplings and voluntary work by the company’s staff in creating the “Centenary Woods”.
• “Open Doors” – In November 2011 the Portucel Group opened the doors of its new Paper Mill in Setúbal to the local community, offering people the chance to see for themselves one of the most advanced and sophisticated production facilities for UWF paper, which has helped to position the Group as the leading European producer of this type of paper and to increase its share of Portuguese exports. This scheme also helped to bring the company closer to its local communities by showcasing its operations and its importance to the development of the Setúbal region, as well as providing an opportunity for promoting the Group’s image and its track record of responsible action on the environment, forest management and biodiversity conservation.
• Landscaping project, replanting of woods in the Parque do Lago, Maiorca (Figueira da Foz) – This project was organized by the Maiorca parish council in partnership with the Group, and consisted of donations of trees of various species which were planted by primary and nursery school children from the vicinity.
• “Aveiro Young Artist 2011” – This competition is organized by Aveiro Municipal Council, and the Group’s contribution consisted in donating paper. The competition is aimed at young artists in all fields – painting, sculpture, writing, photography and digital arts – and seeks to gain public recognition for up-and-coming talent.
• Environmental education project at the Figueira da Foz Municipal Library – The Group joined forces with Figueira da Foz Municipal Council by supporting an education project aimed at the school population in the municipality and designed to encourage environmentally correct attitudes and to instil respect for nature and natural resources in the 600 nursery and primary school pupils taking part. The Group also donated plants of various forest and ornamental species, produced at its own nurseries, which were used in a number of activities and in an “educational garden” to be created indoors in the municipal library.
• Nursery school in Lavos – In partnership with Lavos Parish Council, the Group has supported the construction of a new nursery school in Lavos (Creche António Ferreira de Freitas), which will cater for children from underprivileged homes.
Paper was also donated to schools and welfare organizations in the area of influence of the Group’s mills. A total of 173 donations were made to social, educational and cultural projects in 2011, corresponding to approximately 49 tons of paper.
Consolidated Annual Report 2011 61
Special mention should also be made of the Group’s support for the ICNB (Institute for Wildlife and Biodiversity Conservation) under a cooperation agreement signed in 2010 and designed to promote, develop and implement a system for managing and monitoring the environmental quality of the Sado estuary and associated species.
The Group has continued to strengthen its ties with stakeholders through its different activities, which involved organizing the 2011 International Forestry Conference – “Plantations in Tomorrow’s Forests”, which brought to Lisbon leading specialists from around the world in order to make a decisive contribution to the debate concerning forestry plantations in creating wealth and social well- being.
An active role was also taken in preparing and launching the campaign entitled “More Forests, Better Future”. This has been run by Celpa (the Portuguese Paper Industry Association) in order to promote the country’s paper products. The campaign seeks to underline the quality and sound environmental credentials of paper products, and to convey the importance of the industry to European exports, whilst helping to strengthen the competitiveness of Portugal and its products on international markets.
The Group also lent its support to a number of seminars organized by important bodies, such as the Business and Trades Conference organized by CIP (Portuguese Business Confederation), the annual conference of BCSD Portugal, a seminar on “Energy and Competitiveness” organized by APEA (Portuguese Association of Environmental Engineering) and the 11th National Maintenance Conference, organized by APMI (Portuguese Industrial Maintenance Association).
In the field of internal social responsibility, the Company has continued to pay tribute to its employees who complete 15 and 30 years in the company’s service, presenting them with an award to acknowledge their hard work and dedication.
Commendable work has also been carried out by the Sports Groups which, with the Company’s support, have organized a varied range of cultural and sporting activities designed to encourage healthy social relations between the workforce, with the possibility of involving their families and improving internal cohesion
Consolidated Annual Report 2011 62
Innovation
Consolidating the value proposition
In the course of 2011, the Portucel Group consolidated its value proposition by concluding the development of 8 new products. The high technological standards offered by the new Setúbal paper mill, a thorough understanding of production process and the superior quality of the raw materials used all combined to assure that the market was offered products which are highly consistent both in their intrinsic characteristics and in their excellent functional performance.
Following on from the development of products for the new Setúbal paper mill and rebranding projects for three of the Group’s own brands (Navigator, Discovery and Pioneer), attention was turned to developing and launching Pioneer Fresh Inspiration 75g/m2, a premium product which remains faithful to the brand’s emotional stance, with the signature of “Do more with less”. This is intended to convey the fresh inspiration for reducing the use of resources in a brand which reaches out to a big idea: the world needs to think along new lines.
In the year in which it celebrated its twentieth anniversary, the Soporset brand revamped its communication concept. As the leading European brand in the uncoated printing paper segment, the new brand concept evokes three interdependent ideas: excellent performance (the brand’s key value), technology and environmental innovation.
With a brand heritage stretching back two decades and closely associated with innovation, performance and leadership, the new communication concept focuses on innovation and the environment. Soporset, the brand that pioneered pre-print papers in the market, is 100% biodegradable and recyclable, produced from renewable resources planted specifically for this purpose.
In 2011, the new high porosity pulp proved a market hit, gaining rapid recognition as a premium product, thanks to its excellent characteristics developed specifically to meet the needs of the filters sector, and underlining the Group’s ability to innovate in extremely demanding fields.
In the field of R&D, work was completed on the PADIS research project, promoted jointly by the Group’s subsidiaries Soporcel and RAIZ, with the Universities of Aveiro, Coimbra and Beira Interior, in order to extend our knowledge of the printability of uncoated papers and to design new solutions to improve paper surfaces. The project was co-funded by QREN.
In the field of forestry, the PT-Lyptus project continued to conduct important work, This project has been jointly promoted by the Group’s subsidiaries Portucel Soporcel Florestal and RAIZ with the Higher Institute of Agronomy, with the prime goal of developing, providing and monitoring eucalyptus
Consolidated Annual Report 2011 63
genetic materials better suited to the climate and soil conditions in Portugal, with a view to improving the efficiency of timber production and reducing biotic and abiotic risk factors. This project is also co- funded by QREN.
The AIFF (Association for the Competitiveness of Forest Based Industries), which has the Group as a member of its governing bodies, organized a conference on “The Role of Research in the development of sustainable woodlands”, designed to promote cooperation between the different players in this industry and to help define an agenda for research in the Portuguese forestry sector. The AIFF has been recognized as a force for developing competitiveness and technology and coordinates a significant range of projects geared to innovation.
The importance of the research and development (R&D) projects in which the Group is involved has been recognized by the relevant authorities, including the Innovation Agency, the Ministry of Science, Technology and Higher Education and the Foundation for Science and Technology. Under SIFIDE, the system of tax breaks for companies involved in R&D, these authorities have certified investment projects in this area, with a value of 3.8, 4.1 and 3.7 million euros respectively in 2007, 2008 and 2009. For 2010 and 2011, the Group expects to obtain certification of investment worth 3.8 and 3.2 million euros.
Research & Development
In 2011, the Portucel Group continued to invest in research in forestry and technology, through the work of RAIZ, in coordination with Group companies and a range of bodies in the science and technology sector.
In the field of forestry research, important results have been achieved on projects at the demonstration or implementation stage, as described below. The genetic improvement programme has provided a new hybrid eucalyptus clone which is highly adapted to climatic conditions less favourable to forestation; this clone is now ready for trial plantations.
In the area of forestry protection, laboratory studies have reached an advanced stage in the developing a biological means of combating Gonipterus platensis, a pest which has caused appreciable losses of yields in Portugal’s eucalyptus forests, undermining the profits of forest landowners. These studies have been conducted in partnership with public and private institutions, using new natural enemies of the pest.
Research in the area of soil and forestry nutrition has demonstrated the suitability of lime sludge, an industrial by-product, for correcting the acidity of soil and as an agricultural fertilizer, and work is currently proceeding on gaining official approval for the product.
Consolidated Annual Report 2011 64
In order to look more deeply into the physiological response of eucalyptus to climate issues, with a special emphasis on water, research has been conducted in partnership with the Higher Institute of Agronomy and another forestry company into the consumption and efficiency of water use by Eucalyptus globulus, using information available at national level on the hydrological balance in forested river basins.
Attention should also be drawn to the Group’s significant work in training and technology transfer in the field of good forestry practice, both for the company’s own technical staff and for private forestry producers and their associations. Support was also provided for the Portucel Group’s forest certification processes, in the form of revising technical standards and developing indicators of woodlands sustainability.
In the environmental field, work has been completed on researching and defining a process for obtaining a stabilized product from biological and primary sludge and ash from biomass boilers; an application is being made to approval of this product as a fertilizer for use in forestry. A tool has also been developed to calculate the carbon footprint of pulp and paper products.
As part of the BIIPP project (Integrated Biorefinery in the Pulp and Paper Industry), in partnership with the University of Aveiro, a process has been developed for extracting and purifying organic compounds with high value added from the bark of Eucalyptus globulus.
Design work and preliminary assessments have also been carried out on a solution for the reuse of knots and uncooked portions from pulp production at the Portucel Group’s mills, through cooking in the discontinuous digesters at the Cacia Mill.
Consolidated Annual Report 2011 65
6. Outlook
Expectations for the world economy in 2012 remain extremely uncertain: estimates of global growth have been revised downwards on successive occasions and recession looks possible in certain regions, such as the Euro Zone, as negative risk factors intensify.
The crisis in the Euro Zone took a significant turn for the worse in late 2011, leading to severe measures to consolidate budgets in most European countries. As the banks are the main holders of sovereign debt, the financial system has come under significant strain, resulting in serious difficulties in funding and sharp contraction of household and business lending, further exacerbated by newly- imposed requirements for the recapitalization of European banks.
Expectations of economic growth for the region have been gradually cut back, with most estimates pointing to negative growth in the economy: this contraction is expected to be moderate overall, but unevenly distributed between outlying and central regions. Although the end of the year saw a rush of measures to increase integration and fiscal discipline, with steps to boost the financial measures to support the countries facing the greatest difficulties and to increase the intervention of the European Central Bank as the lender of last resort, the climate remains one of great uncertainty.
In the US, the economy showed signs of recovery in late 2011, with the main economic indicators evolving positively as a whole, thanks to stronger than expected consumer spending and investment. However, expectations continue to point to very moderate growth, due to high rates of unemployment and borrowing. Serious doubts also remain concerning the budget consolidation policies which will be required in the long term due to worsening public debt, as a result of continuing foreign and budget deficits, only expected to improve after the presidential elections due to be held in 2012.
The economies of emerging markets, and of China in particular, are not expected to be immune to this cooling of the developed economies, with growth rates dipping in 2012. Although a hard landing is not forecast for these economies, there are still a number of risks associated with rapidly growth in lending and in the price of assets in recent years, which could make these economies financially vulnerable.
At the same time, the euro / dollar exchange rate, which has a significant impact on Group business, remains subject to a high degree of unpredictability, in view of the economic expectations described above.
The outlook for the Group’s UWF paper business reflects this environment. In Europe, the poor economic prospects, exacerbated by the budget consolidation policies underway in most countries,
Consolidated Annual Report 2011 66
and most severely in southern European countries, which are traditionally markets of great importance for the Group’s sales, means that paper consumption will remain under strong pressure.
Likewise, the Group’s business may be hit by the cooling of the US economy, albeit with a more positive outlook than in Europe, and by continued instability in the markets of North Africa and the Middle East, which account for a growing proportion of Group sales.
However, the Group has a business model which has proved highly resilient to adverse environments and continues to operate at full production capacity, thanks to market recognition of the quality of its products, the high level of penetration achieved with mill brands and the Group’s capacity to extend the list of countries to which it sells it products and to strengthen its position in markets which still offer the potential for growth. Nonetheless, the significant customs duties to which European products are subject in overseas markets is a hindrance to greater and faster penetration of the Group´s products in these markets.
At the same time, the impact of significant capacity closures which took place in 2011 will only be felt in full during the year ahead and a recovery is possible in pulp prices, keeping non-integrated manufacturers under strong pressure: these combined factors may help to sustain the market. In addition, in the US, the growing consolidation of the sector, reflected in improved capacity to match supply to demand, and the presidential campaign due to take place this year, will contribute to the sustainability of the market.
The BEKP pulp market has shown signs of recovery, sustained by robust demand from Asian markets, and China in particular, and by a continued trend for replacing long fibre consumption with short fibre pulp, with the greatest impact on the developed markets. However, growth in demand, resulting from the start-up of new capacity in Brazil, may disrupt the balance between supply and demand towards the end of the year.
The international economic and financial outlook, which has hit profitability in the pulp and paper sector so hard, makes it even more urgent for policies to be adopted in Portugal to reduce the local costs which encumber the production and export of tradable goods and consequently of the Group’s activities. Priority needs to be given to measures that simplify plantation activities in order to increase the availability of raw materials, creating thousands of new jobs, and avoiding the need for imports. Priority must also be given to other measures that assure that the logistical chain – in particular, the ports and railways - operates to the highest international standards.
Consolidated Annual Report 2011 67
Acknowledgments
Despite an extremely harsh business environment, the Portucel Group has expanded its business in the fields of paper manufacture, pulp manufacture and power generation, consolidating its position as one of Portugal’s chief exporters.
The excellent performance recorded over the year would not have been possible without the great dedication and commitment of all the Group’s employees, to whom the Directors wish to express their thanks.
A word of appreciation is likewise extended to all the Group’s external stakeholders – customers, suppliers, shareholders and other partners – for their interest and support.
Setúbal, 30 January 2012
Pedro Mendonça de Queiroz Pereira - Chairman of the Directors José Alfredo de Almeida Honório - Chief Executive Officer Manuel Soares Ferreira Regalado - Executive Director Adriano Augusto da Silva Silveira - Executive Director António José Pereira Redondo - Executive Director José Fernando Morais Carreira de Araújo - Executive Director Luís Alberto Caldeira Deslandes - Non-executive Director Manuel Maria Pimenta Gil Mata - Non-executive Director Francisco José Melo e Castro Guedes - Non-executive Director José Miguel Pereira Gens Paredes - Non-executive Director Paulo Miguel Garcês Ventura - Non-executive Director
Consolidated Annual Report 2011 68
Declaration required under Article 245.1 c) of the Securities Code
Article 245.1 c) of the Securities Code requires that each of the persons responsible for issuers make a number of declarations, as described in this article. In the case of Portucel, a uniform declaration has been adopted, worded as follows:
I hereby declare, under the terms and for the purposes of Article 245.1 c) of the Securities Code that, to the best of my knowledge, the management report, annual accounts, legal accounts certificate and other financial statements of Portucel – Empresa Produtora de Pasta e Papel, S.A., for the financial year of 2011, were drawn up in accordance with the relevant accounting rules, and provide a true and fair view of the assets and liabilities, financial affairs and profit or loss of the said company and other companies included in the consolidated accounts, and that the management report contains a faithful account of the business, performance and position of the said company and other companies included in the consolidated accounts, describing the main risks and uncertainties which they face.
Considering that the members of the Audit Board and the Official Auditor sign an equivalent declaration in relation to the documents for which they are responsible, a separate declaration with the above text was signed by the directors only, as it was deemed that only the company officers fall within the concept of “persons responsible for the issuer”. As required by this rule, we provide below a list of the persons signing the declaration and their office in the company:
Pedro Mendonça de Queiroz Pereira - Chairman of the Directors José Alfredo de Almeida Honório - Chief Executive Officer Manuel Soares Ferreira Regalado - Executive Director Adriano Augusto da Silva Silveira - Executive Director António José Pereira Redondo - Executive Director José Fernando Morais Carreira de Araújo - Executive Director Luís Alberto Caldeira Deslandes - Non-executive Director Manuel Maria Pimenta Gil Mata - Non-executive Director Francisco José Melo e Castro Guedes - Non-executive Director José Miguel Pereira Gens Paredes - Non-executive Director Paulo Miguel Garcês Ventura - Non-executive Director
Consolidated Annual Report 2011 69
Company Officers
The company officers of Portucel – Empresa Produtora de Pasta e Papel S.A. elected for the four- year term from 2011 to 2014 are as follows:
General Meeting
Chairman: José Pedro Aguiar Branco*
Secretary: Rita Maria Pinheiro Ferreira
Board of Directors
Chairman: Pedro Mendonça de Queiroz Pereira
Directors: José Alfredo de Almeida Honório Manuel Soares Ferreira Regalado Adriano Augusto da Silva Silveira António José Pereira Redondo José Fernando Morais Carreira de Araújo Luís Alberto Caldeira Deslandes Manuel Maria Pimenta Gil Mata Francisco José Melo e Castro Guedes José Miguel Pereira Gens Paredes Paulo Miguel Garcês Ventura
Executive Board
Chairman: José Alfredo de Almeida Honório
Members: Manuel Soares Ferreira Regalado Adriano Augusto da Silva Silveira António José Pereira Redondo José Fernando Morais Carreira de Araújo
Company Secretary
Secretary: António Pedro Gomes Paula Neto Alves Alternate Secretary: António Alexandre de Almeida e Noronha da Cunha Reis
Audit Board
Chairman: Miguel Camargo de Sousa Eiró
Consolidated Annual Report 2011 70
Full Members: Duarte Nuno d’Orey da Cunha Gonçalo Nuno Palha Gaio Picão Caldeira Alternate Member: Marta Isabel Guardalino da Silva Penetra
Remuneration Committee
Chairman: José Gonçalo Maury, representing Egon Zehnder
Members: João Rodrigo Appleton Moreira Rato Frederico José da Cunha Mendonça e Meneses
Official Auditor
PricewaterhouseCoopers & Associados – SROC, Lda represented by António Alberto Henrique Assis or César Abel Rodrigues Gonçalves
Alternate: José Manuel Henriques Bernardo (ROC)
* Note: Dr. José Pedro Aguiar Branco tendered his resignation on 21 June 2011, and the office is currently vacant, pending the election of new Chairman by the Company’s next General Meeting.
Consolidated Annual Report 2011 71
Disclosures required by Articles 447 and 448 of the Companies Code and paras. 6 and 7 of Article 14 of Securities Market Commission Regulation 5/2008 (with regard to the financial year of 2011)
1. NUMBER OF SHARES HELD BY THE COMPANY OFFICERS AS AT 31/12/2011
a) Securities issued by company and held by company officers:
António José Pereira Redondo: 6,000 shares Adriano Augusto da Silva Silveira: 2,000 shares Duarte Nuno d’Orey da Cunha: 16,000 shares
b) Securities issued by controlled or controlling companies held by company officers:
José Alfredo de Almeida Honório: 20,000 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A. Duarte Nuno d’Orey da Cunha: 2,907 shares in Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. Maria Rita Carvalhosa Mendes de Almeida Queiroz Pereira – 16,464 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A.
c) Securities issued by the company and controlled or controlling companies held by companies in which members of management bodies hold corporate office:
• Cimigest, SGPS, S.A. - 100 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A.; • Cimo – Gestão de Participações, SGPS, S.A. – 16,199,031 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A.; • Longapar, SGPS, S.A. – 21,505,400 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A. • Sodim, SGPS, S.A. – 18,842,424 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A. • OEM - Organização de Empresas, SGPS, S.A. – 535,000 shares in Semapa – Sociedade de Investimento e Gestão, SGPS, S.A.
Consolidated Annual Report 2011 72
Acquisition, disposal, encumbrance or pledge of securities issued by the company or controlled, controlling or group companies by company officers and the companies referred to in 3:
• Seminv – Investimentos SGPS, S.A. carried out the following OTC operation involving shares in Portucel - Empresa Produtora de Pasta e Papel, S.A.:
Seminv
Date Numb.of Shares Share Price Transaction
03-03-2011 589,400 2.545 Sale
• Cimigest, SGPS, S.A. carried out the following OTC operation involving shares in Portucel - Empresa Produtora de Pasta e Papel, S.A.:
Cimigest
Date Numb.of Shares Share Price Transaction
18-03-2011 1,669,253 2.500 Sale
• Cimentospar – Participações Sociais, SGPS, S.A. carried out the following OTC operation involving shares in Portucel - Empresa Produtora de Pasta e Papel, S.A.:
Cimentospar
Date Numb.of Shares Share Price Transaction
30-03-2011 588,400 2.469 Sale
• Cimo – Gestão de Participações, SGPS, S.A. carried out the following OTC operation involving shares in Portucel - Empresa Produtora de Pasta e Papel, S.A.:
Cimo
Date Numb.of Shares Share Price Transaction
09-05-2011 107,204 2.484 Sale
Consolidated Annual Report 2011 73
• Seinpart – Participações, SGPS, S.A. carried out the following OTC operation involving shares in Portucel - Empresa Produtora de Pasta e Papel, S.A.:
Seinpart
Date Numb.of Shares Share Price Transaction
29-12-2011 230,839,400 1.750 Sale
• Zoom Investment SGPS S.A. carried out the following transactions in shares in Portucel – Empresa Produtora de Pasta e Papel, S.A.:
Numb.of Date Shares Share Price Transaction
24-03-2011 6,958 2.4590 Purchase 18-04-2011 38,042 2.4500 Purchase 05-05-2012 45,000 2.4470 Purchase 19-05-2012 10,000 2.4500 Purchase 29-08-2011 21,723 1.8490 Purchase 30-08-2011 23,277 1.8500 Purchase 30-08-2011 5,000 1.8400 Purchase 30-08-2011 5,000 1.8310 Purchase 30-08-2011 10,000 1.8320 Purchase 31-08-2011 20,000 1.9093 Purchase 31-08-2011 20,000 1.9278 Purchase 01-09-2012 5,000 1.9100 Purchase 01-09-2012 8,000 1.9000 Purchase 01-09-2012 15,000 1.8800 Purchase 01-09-2012 15,000 1.9020 Purchase 01-09-2012 10,000 1.9050 Purchase 01-09-2012 10,000 1.8850 Purchase 01-09-2012 10,000 1.8965 Purchase 02-09-2011 7,000 1.8820 Purchase 02-09-2011 12,500 1.8740 Purchase 02-09-2011 25,500 1.8700 Purchase 02-09-2011 5,000 1.8750 Purchase 02-09-2011 10,000 1.8600 Purchase 02-09-2011 12,000 1.8510 Purchase 02-09-2011 10,000 1.8600 Purchase 02-09-2011 10,000 1.8390 Purchase 02-09-2011 5,000 1.8481 Purchase 02-09-2011 10,000 1.8390 Purchase 05-09-2011 20,000 1.7940 Purchase 06-09-2011 10,000 1.8370 Purchase 06-09-2011 10,000 1.8300 Purchase 06-09-2011 10,000 1.8270 Purchase 06-09-2011 10,000 1.8240 Purchase 06-09-2011 10,000 1.8190 Purchase 06-09-2011 10,000 1.8000 Purchase 06-09-2011 10,000 1.7890 Purchase
Consolidated Annual Report 2011 74
06-09-2011 20,000 1.8120 Purchase 06-09-2011 20,000 1.8120 Purchase 06-09-2011 10,000 1.8040 Purchase 07-09-2011 20,000 1.8450 Purchase 07-09-2011 10,000 1.8420 Purchase 09-09-2012 20,000 1.8210 Purchase 09-09-2012 20,000 1.8110 Purchase 09-09-2012 20,000 1.8060 Purchase 09-09-2012 10,000 1.8000 Purchase 12-09-2011 10,000 1.7650 Purchase 12-09-2011 20,000 1.7760 Purchase 12-09-2011 10,000 1.7700 Purchase 12-09-2011 20,000 1.7790 Purchase 12-09-2011 10,000 1.7740 Purchase 12-09-2011 10,000 1.7620 Purchase 13-09-2011 10,000 1.7640 Purchase 13-09-2011 10,000 1.7500 Purchase 13-09-2011 10,000 1.7400 Purchase 13-09-2011 10,000 1.7300 Purchase 13-09-2011 30,000 1.7490 Purchase 13-09-2011 10,000 1.7440 Purchase 13-09-2011 10,000 1.7500 Purchase 13-09-2011 10,000 1.7500 Purchase 13-09-2011 15,000 1.7580 Purchase 13-09-2011 10,000 1.7510 Purchase 13-09-2012 16,369 1.7500 Purchase 14-09-2011 10,000 1.7250 Purchase 14-09-2011 10,000 1.7200 Purchase 14-09-2011 37,835 1.7310 Purchase 14-09-2011 20,000 1.7280 Purchase 14-09-2011 10,000 1.7240 Purchase 14-09-2011 30,000 1.7420 Purchase 14-09-2011 10,000 1.7250 Purchase 14-09-2011 10,000 1.7460 Purchase 14-09-2011 15,796 1.7490 Purchase 14-09-2011 10,000 1.7400 Purchase 14-09-2011 437 1.7390 Purchase 15-09-2011 10,000 1.7990 Purchase 15-09-2011 10,000 1.7920 Purchase 15-09-2011 50,000 1.8100 Purchase 15-09-2011 20,000 1.8140 Purchase 15-09-2011 10,000 1.8100 Purchase 15-09-2011 9,563 1.8180 Purchase 15-09-2011 20,000 1.8040 Purchase 16-09-2011 30,000 1.8100 Purchase 16-09-2011 50,000 1.8000 Purchase 16-09-2011 2,171 1.8000 Purchase 19-09-2011 10,000 1.7870 Purchase 19-09-2011 10,000 1.7880 Purchase 20-09-2011 7,826 1.7640 Purchase 20-09-2011 20,000 1.7690 Purchase 20-09-2011 6,037 1.7650 Purchase 20-09-2011 20,000 1.7700 Purchase 20-09-2011 10,000 1.7640 Purchase 20-09-2011 10,000 1.7670 Purchase
Consolidated Annual Report 2011 75
20-09-2011 10,000 1.7680 Purchase 20-09-2011 10,000 1.7650 Purchase 20-09-2011 10,000 1.7690 Purchase 20-09-2011 10,000 1.7670 Purchase 20-09-2011 10,000 1.7690 Purchase 20-09-2011 10,000 1.7660 Purchase 20-09-2011 10,000 1.7650 Purchase 20-09-2011 10,000 1.7660 Purchase 20-09-2011 20,000 1.7670 Purchase 20-09-2011 10,000 1.7640 Purchase 20-09-2011 10,000 1.7650 Purchase 20-09-2011 10,000 1.7710 Purchase 21-09-2011 10,000 1.7490 Purchase 21-09-2011 10,000 1.7400 Purchase 21-09-2011 10,000 1.7420 Purchase 21-09-2011 10,000 1.7430 Purchase 21-09-2011 10,000 1.7430 Purchase 21-09-2011 4,857 1.7330 Purchase 21-09-2011 20,000 1.7410 Purchase 21-09-2011 20,000 1.7400 Purchase 21-09-2011 10,000 1.7400 Purchase 21-09-2011 10,000 1.7400 Purchase 21-09-2011 20,000 1.7460 Purchase 21-09-2011 10,000 1.7370 Purchase 21-09-2011 6,190 1.7450 Purchase 21-09-2011 10,000 1.7400 Purchase 21-09-2011 20,000 1.7440 Purchase 22-09-2011 5,000 1.7160 Purchase 22-09-2011 5,000 1.7130 Purchase 22-09-2011 5,000 1.7160 Purchase 22-09-2011 5,000 1.7100 Purchase 22-09-2011 10,000 1.7090 Purchase 22-09-2011 5,000 1.7070 Purchase 22-09-2011 5,000 1.7040 Purchase 22-09-2011 5,745 1.7040 Purchase 22-09-2011 10,000 1.7050 Purchase 22-09-2011 10,000 1.7060 Purchase 22-09-2011 4,873 1.7190 Purchase 23-09-2011 5,000 1.7080 Purchase 23-09-2011 5,000 1.7160 Purchase 23-09-2011 10,000 1.6910 Purchase 23-09-2011 10,000 1.6920 Purchase 23-09-2011 1,416 1.6980 Purchase 23-09-2011 10,000 1.7200 Purchase 26-09-2011 10,000 1.7290 Purchase 26-09-2011 20,000 1.7210 Purchase 27-09-2011 50,000 1.7500 Purchase 27-09-2011 10,882 1.7490 Purchase 01-11-2011 90,000 1.8020 Purchase 16-12-2011 10,000 1.7150 Purchase 20-12-2011 15,000 1.7500 Purchase 21-12-2011 10,000 1.7300 Purchase 21-12-2011 10,000 1.7360 Purchase 21-12-2011 10,000 1.7250 Purchase 22-12-2011 20,000 1.7400 Purchase
Consolidated Annual Report 2011 76
22-12-2011 1,456 1.7300 Purchase
• Semapa Sociedade de Investimento e Gestão SGPS S.A. carried out the following OTC operations involving shares in Portucel – Empresa Produtora de Pasta e Papel, S.A.:
Date Numb.of Shares Share Price Transaction
03-03-2011 589,400 2.545 Purchase 18-03-2011 1,669,253 2.500 Purchase 30-03-2011 588,400 2.469 Purchase 09-05-2011 107,204 2.484 Purchase 29-12-2011 230,839,400 1.750 Purchase
• A Semapa - Sociedade de Investimento e Gestão SGPS, S.A. carried out the following OTC operations involving shares in Portucel – Empresa Produtora de Pasta e Papel, S.A.: Numb.of Date Shares Share Price Transaction
31-05-2011 160,000 2.431 Purchase 02-06-2011 25,000 2.358 Purchase 08-06-2011 50,000 2.332 Purchase 15-06-2011 40,000 2.260 Purchase 16-06-2011 33,000 2.232 Purchase 17-06-2011 75,000 2.205 Purchase 20-06-2011 26,250 2.183 Purchase 21-06-2011 18,500 2.209 Purchase 22-06-2011 7,000 2.210 Purchase 23-06-2011 5,000 2.186 Purchase 24-06-2011 12,500 2.190 Purchase 27-06-2011 13,000 2.195 Purchase 28-06-2011 22,500 2.209 Purchase 29-06-2011 9,200 2.249 Purchase 30-06-2011 12,500 2.284 Purchase 04-07-2011 11,000 2.310 Purchase 05-07-2011 7,000 2.308 Purchase 06-07-2011 7,500 2.268 Purchase 12-07-2011 10,000 2.148 Purchase 13-07-2011 25,000 2.203 Purchase 28-07-2011 85,000 2.082 Purchase 29-07-2011 10,000 2.069 Purchase 01-08-2011 27,000 2.046 Purchase 02-08-2011 100,000 2.022 Purchase 02-08-2011 25,000 1.988 Purchase 04-08-2011 25,000 1.944 Purchase 05-08-2011 35,000 1.895 Purchase 08-08-2011 15,000 1.847 Purchase
Consolidated Annual Report 2011 77
16-08-2011 22,500 1.818 Purchase 18-08-2011 23,237 1.815 Purchase 19-08-2011 32,106 1.803 Purchase 22-08-2011 8,905 1.809 Purchase 23-08-2011 20,672 1.816 Purchase 24-08-2011 6,217 1.804 Purchase 25-08-2011 30,000 1.839 Purchase 26-08-2011 13,950 1.811 Purchase 30-08-2011 33,700 1.844 Purchase 12-09-2011 32,500 1.771 Purchase 13-09-2011 50,000 1.745 Purchase 14-09-2011 44,757 1.734 Purchase 22-09-2011 45,000 1.714 Purchase
Consolidated Annual Report 2011 78
2. LIST OF QUALIFYING HOLDINGS AT 31 DECEMBER 2011 (as required by Article 20 of the Securities Code)
% of capital and voting % of non-suspended Entity Nº Shares rights voting rights
Semapa SGPS SA 582,172,407 75.85% 78.10%
Semapa - Soc. de Investimento e Gestão, SGPS, S.A. 340,571,392 44.37% 45.69% Seinpar Investments B.V. 241,583,015 31.48% 32.41% Seminv - Investimentos, SGPS, S.A. 1,000 0.00% 0.00% Cimentospar - Participações Sociais, SGPS, L.da 1,000 0.00% 0.00% Duarte Nuno d'Orey da Cunha (*) 16,000 0.00% 0.00%
Bestinver Gestión, S.A. SGIIC 15,407,418 2.01% 2.07%
Bestinver Bolsa, F.I. 5,532,650 0.72% 0.74% Bestinfond, F.I. 4,775,869 0.62% 0.64% Bestinver Global, FP 1,268,711 0.17% 0.17% Bestinver Mixto, F.I, 906,989 0.12% 0.12% Soixa Sicav 855,721 0.11% 0.11% Bestinver Bestvalue SICAV 757,838 0.10% 0.10% Bestinver Ahorro, FP 751,543 0.10% 0.10% Texrenta Inversiones, SICAV 234,336 0.03% 0.03% Bestinver Value Investor SICAV 207,049 0.03% 0.03% Divalsa de Inversiones, SICAV, SA 38,893 0.01% 0.01% Bestinver Empleo FP 34,924 0.00% 0.00% Linker Inversiones, SICAV, SA 23,776 0.00% 0.00% Sumeque Capital, SICAV 15,508 0.00% 0.00% Bestinver Empleo II, FP 1,987 0.00% 0.00% Bestvalue, FI 1,624 0.00% 0.00%
(*) Member of Portucel Governing Bodies
At 31/12/2011, Portucel held 22 111 382 own shares representing 2.88 % of its share capital.
3. INFORMATION ON OWN SHARES (required by Articles 66 and 324.2 of the Companies Code)
As required by Articles 66 and 324.2 of the Companies Code, a Portucel – Empresa Produtora de Pasta e Papel, S.A., hereby discloses that during the financial year of 2011 it made the following acquisitions of its own shares:
Numb.of Date Shares Share Price Accumulated Shares
22-02-2011 23,000 2.5075 15,077,358 23-02-2011 165,000 2.4908 15,242,358 24-02-2011 150,000 2.4856 15,392,358 25-02-2011 65,000 2.5134 15,457,358 28-02-2011 70,000 2.5452 15,527,358 28-02-2011 100,000 2.5240 15,627,358 01-03-2011 2,000 2.5700 15,629,358 04-03-2011 45,000 2.5372 15,674,358 07-03-2011 40,000 2.5407 15,714,358 08-03-2011 55,000 2.5470 15,769,358
Consolidated Annual Report 2011 79
09-03-2011 35,380 2.5467 15,804,738 09-03-2011 20,000 2.5450 15,824,738 15-03-2011 70,000 2.4784 15,894,738 16-03-2011 15,000 2.4800 15,909,738 17-03-2011 22,500 2.4937 15,932,238 18-03-2011 4,732 2.4959 15,936,970 23-03-2011 20,000 2.4597 15,956,970 23-03-2011 150,000 2.4600 16,106,970 24-03-2011 50,000 2.4619 16,156,970 25-03-2011 45,000 2.4669 16,201,970 28-03-2011 20,000 2.4678 16,221,970 29-03-2011 15,000 2.4665 16,236,970 30-03-2011 5,000 2.4675 16,241,970 31-03-2011 10,000 2.4700 16,251,970 01-04-2011 11,812 2.4692 16,263,782 05-04-2011 70,000 2.4707 16,333,782 06-04-2011 1,094 2.4600 16,334,876 12-04-2011 50,000 2.4820 16,384,876 13-04-2011 50,000 2.4800 16,434,876 13-04-2011 10,000 2.4700 16,444,876 18-04-2011 60,000 2.4593 16,504,876 19-04-2011 15,000 2.4690 16,519,876 27-04-2011 20,000 2.4700 16,539,876 27-04-2011 300,000 2.4650 16,839,876 03-05-2011 30,000 2.5202 16,869,876 04-05-2011 165,000 2.4805 17,034,876 05-05-2011 67,000 2.4474 17,101,876 05-05-2011 300,000 2.4600 17,401,876 06-05-2011 35,000 2.4597 17,436,876 06-05-2011 250,000 2.4600 17,686,876 13-05-2011 5,820 2.4800 17,692,696 16-05-2011 12,892 2.4700 17,705,588 17-05-2011 125,000 2.4624 17,830,588 17-05-2011 80,000 2.4606 17,910,588 18-05-2011 115,000 2.4633 18,025,588 19-05-2011 14,223 2.4726 18,039,811 20-05-2011 7,816 2.4672 18,047,627 20-05-2011 100,000 2.4650 18,147,627 23-05-2011 22,500 2.4546 18,170,127 24-05-2011 54,229 2.4693 18,224,356 25-05-2011 14,191 2.4667 18,238,547 26-05-2011 55,000 2.4526 18,293,547 27-05-2011 49,000 2.4485 18,342,547 30-05-2011 60,000 2.4257 18,402,547 31-05-2011 110,000 2.4222 18,512,547 31-05-2011 50,000 2.4311 18,562,547 01-06-2011 52,500 2.3916 18,615,047 02-06-2011 16,000 2.3716 18,631,047 02-06-2011 25,000 2.3580 18,656,047 03-06-2011 45,000 2.3983 18,701,047 06-06-2011 22,000 2.3890 18,723,047 07-06-2011 44,000 2.3469 18,767,047 07-06-2011 50,000 2.3480 18,817,047 08-06-2011 50,000 2.3320 18,867,047 08-06-2011 50,000 2.3168 18,917,047
Consolidated Annual Report 2011 80
09-06-2011 3,817 2.3150 18,920,864 10-06-2011 11,000 2.3080 18,931,864 13-06-2011 27,500 2.2644 18,959,364 13-06-2011 30,000 2.2750 18,989,364 14-06-2011 30,000 2.2853 19,019,364 17-06-2011 75,000 2.2094 19,094,364 20-06-2011 26,250 2.1830 19,120,614 21-06-2011 18,500 2.2088 19,139,114 22-06-2011 7,000 2.2099 19,146,114 23-06-2011 5,000 2.1857 19,151,114 24-06-2011 12,500 2.1898 19,163,614 27-06-2011 13,000 2.1948 19,176,614 28-06-2011 22,500 2.2087 19,199,114 29-06-2011 9,200 2.2488 19,208,314 30-06-2011 12,500 2.2844 19,220,814 04-07-2011 11,000 2.3101 19,231,814 05-07-2011 7,000 2.3084 19,238,814 05-08-2011 50,000 1.8990 19,288,814 08-08-2011 70,000 1.8362 19,358,814 09-08-2011 80,000 1.7667 19,438,814 10-08-2011 66,298 1.7919 19,505,112 11-08-2011 95,000 1.7909 19,600,112 12-08-2011 85,000 1.8014 19,685,112 21-09-2011 87,500 1.7433 19,772,612 22-09-2011 37,500 1.7131 19,810,112 23-09-2011 45,000 1.7031 19,855,112 26-09-2011 85,000 1.7266 19,940,112 27-09-2011 39,000 1.7499 19,979,112 28-09-2011 30,000 1.7382 20,009,112 29-09-2011 45,000 1.7453 20,054,112 30-09-2011 37,530 1.7523 20,091,642 04-10-2011 110,000 1.7767 20,201,642 04-10-2011 75,000 1.7775 20,276,642 05-10-2011 100,000 1.7830 20,376,642 05-10-2011 59,000 1.7837 20,435,642 06-10-2011 68,000 1.8271 20,503,642 06-10-2011 53,789 1.8245 20,557,431 07-10-2011 47,823 1.8500 20,605,254 07-10-2011 5,859 1.8405 20,611,113 18-10-2011 3,480 1.8486 20,614,593 19-10-2011 2,500 1.8500 20,617,093 28-10-2011 30,000 1.8372 20,647,093 31-10-2011 31,000 1.8278 20,678,093 31-10-2011 36,000 1.8267 20,714,093 01-11-2011 30,000 1.7774 20,744,093 01-11-2011 32,000 1.7794 20,776,093 02-11-2011 29,000 1.7453 20,805,093 02-11-2011 40,000 1.7469 20,845,093 03-11-2011 10,000 1.7642 20,855,093 03-11-2011 1,500 1.7160 20,856,593 04-11-2011 27,500 1.7824 20,884,093 04-11-2011 46,000 1.7924 20,930,093 07-11-2011 8,500 1.7740 20,938,593 08-11-2011 10,000 1.7684 20,948,593 09-11-2011 23,000 1.7634 20,971,593
Consolidated Annual Report 2011 81
10-11-2011 27,469 1.8000 20,999,062 11-11-2011 25,000 1.8185 21,024,062 15-11-2011 27,738 1.8000 21,051,800 15-11-2011 45,000 1.8040 21,096,800 16-11-2011 11,000 1.7989 21,107,800 16-11-2011 11,000 1.7904 21,118,800 17-11-2011 11,000 1.7701 21,129,800 17-11-2011 10,000 1.7717 21,139,800 18-11-2011 2,500 1.7630 21,142,300 18-11-2011 3,000 1.7500 21,145,300 21-11-2011 21,000 1.7209 21,166,300 21-11-2011 18,000 1.7220 21,184,300 22-11-2011 10,000 1.7116 21,194,300 22-11-2011 12,000 1.7097 21,206,300 23-11-2011 12,500 1.7113 21,218,800 23-11-2011 13,000 1.7093 21,231,800 24-11-2011 22,000 1.7449 21,253,800 24-11-2011 23,000 1.7409 21,276,800 25-11-2011 31,500 1.7647 21,308,300 25-11-2011 27,000 1.7632 21,335,300 28-11-2011 31,180 1.7986 21,366,480 28-11-2011 30,000 1.7959 21,396,480 29-11-2011 16,000 1.7834 21,412,480 29-11-2011 19,500 1.7782 21,431,980 30-11-2011 37,175 1.7841 21,469,155 30-11-2011 39,000 1.7850 21,508,155 01-12-2011 31,000 1.7820 21,539,155 01-12-2011 38,000 1.7826 21,577,155 02-12-2011 23,000 1.7951 21,600,155 02-12-2011 75,000 1.7981 21,675,155 05-12-2011 8,495 1.7894 21,683,650 05-12-2011 7,651 1.7820 21,691,301 06-12-2011 7,500 1.7965 21,698,801 06-12-2011 2,811 1.7956 21,701,612 07-12-2011 13,500 1.7967 21,715,112 07-12-2011 25,000 1.7970 21,740,112 08-12-2011 10,000 1.7730 21,750,112 08-12-2011 12,500 1.7798 21,762,612 09-12-2011 3,639 1.7930 21,766,251 09-12-2011 6,428 1.7906 21,772,679 12-12-2011 21,000 1.7702 21,793,679 12-12-2011 20,000 1.7716 21,813,679 13-12-2011 11,500 1.7532 21,825,179 13-12-2011 12,000 1.7563 21,837,179 14-12-2011 15,500 1.7296 21,852,679 14-12-2011 17,000 1.7309 21,869,679 15-12-2011 7,500 1.7339 21,877,179 15-12-2011 7,000 1.7333 21,884,179 16-12-2011 15,000 1.7196 21,899,179 16-12-2011 20,000 1.7246 21,919,179 19-12-2011 7,000 1.7184 21,926,179 19-12-2011 6,000 1.7211 21,932,179 20-12-2011 21,000 1.7403 21,953,179 20-12-2011 38,278 1.7409 21,991,457 21-12-2011 20,000 1.7304 22,011,457
Consolidated Annual Report 2011 82
21-12-2011 21,458 1.7287 22,032,915 22-12-2011 16,500 1.7360 22,049,415 22-12-2011 22,500 1.7345 22,071,915 23-12-2011 2,500 1.7330 22,074,415 27-12-2011 16,364 1.7771 22,090,779 27-12-2011 9,153 1.7528 22,099,932 28-12-2011 5,000 1.7900 22,104,932 28-12-2011 6,450 1.7896 22,111,382
Total amount in 2011 7,057,024 Total number of own shares held 22,111,382
Consolidated Annual Report 2011 83
CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 2011
Consolidated Annual Report 2011 84
CONSOLIDATED SEPARATE INCOME STATEMENT AS OF 31 DECEMBER 2011 AND 2010
4th Quarter 4th Quarter Amounts in Euros Notes 2011 2010 2011 2010 Revenues 4 Sales 1,484,263,944 1,381,917,937 389,811,877 380,442,809 Services rendered 3,620,349 3,537,751 2,161,535 1,347,962 Other operating income 5 Gains on the sale of non-current assets 75,040 3,194,781 16,481 246,706 Other operating income 21,407,642 19,664,346 5,945,493 5,351,303 Change in the fair value of biological assets 18 266,690 (7,787,354) 1,001,269 100,310 Cos ts 6 Cost of inventories sold and consumed (580,268,510) (517,223,456) (158,631,294) (151,967,019) Variation in production (38,752,817) (5,635,463) (7,850,096) (1,175,390) Cost of materials and services consumed (358,296,358) (336,907,043) (99,799,184) (90,949,593) Payroll costs (133,713,092) (127,020,239) (32,100,505) (32,143,119) Other costs and losses (13,529,807) (13,574,714) (3,442,362) 222,973 Provisions 5,610,786 (1,165,032) 10,053,964 (22,056,901) Depreciation, amortization and impairment losses 8 (124,527,404) (121,184,784) (31,598,272) (23,888,256) Operational results 266,156,463 277,816,730 75,568,905 65,531,785
Group share of (loss) / gains of associated companies a 593,751 - (296,738) - Net financial results 10 (16,346,454) (20,079,417) (1,076,782) (3,011,167) Profit before tax 250,403,760 257,737,313 74,195,385 62,520,618
Income tax 11 (54,057,904) (47,157,088) (21,923,791) (6,108,751) Net Income 196,345,856 210,580,225 52,271,595 56,411,867
Non-controlling interests 13 (14,467) 7,855 (40,472) (91,249) Net profit for the year 196,331,389 210,588,080 52,231,122 56,320,618
Earnings per share Basic earnings per share, Eur 12 0.262 0.280 0.070 0.075 Diluted earnings per share, Eur 12 0.262 0.280 0.070 0.075
Consolidated Annual Report 2011 85
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF 31 DECEMBER 2011 AND 2010
Amounts in Euro Notes 31-Dec-2011 31-Dec-2010
ASSETS Non-Current Assets Goodw ill 15 376,756,384 376,756,384 Other intangible assets 16 2,776,759 94,486 Plant, property and equipment 17 1,529,709,225 1,604,129,728 Biological assets 18 110,769,306 110,502,616 Available-for-sale financial assets 19 126,031 126,074 Investment in associates 19 1,778,657 516,173 Deferred tax assets 26 46,271,758 22,963,945 2,068,188,120 2,115,089,406 Current Assets Inventories 20 188,690,926 172,899,681 Receivable and other current assets 21 242,257,094 212,839,536 State and other public entities 22 54,684,123 32,228,030 Cash and cash equivalents 29 267,431,715 133,958,910 753,063,858 551,926,157 Total Assets 2,821,251,978 2,667,015,563
EQUITY AND LIABILITIES Capital and Reserves Share capital 24 767,500,000 767,500,000 Treasury shares 24 (42,154,975) (26,787,706) Fair value reserves 25 (523,244) 78,040 Other reserves 25 57,546,582 47,005,845 Translation reserves 25 (485,916) 881,575 Other reserves 25 499,721,012 304,020,378 Net profit for the period 196,331,389 210,588,080 1,477,934,848 1,303,286,212 Non-controlling interests 13 220,660 216,755 1,478,155,508 1,303,502,967
Non-current liabilities Deferred taxes liabilities 26 193,236,695 164,998,958 Pensions and other post-employment benefits 27 16,682,785 13,713,756 Provisions 28 19,602,592 25,213,377 Interest-bearing liabilities 29 566,813,031 729,696,907 Other non-current liabilities 29 18,109,324 24,471,153 814,444,427 958,094,151 Current liabilities Interest-bearing liabilities 29 164,085,292 91,250,000 Payables and other current liabilities 30 284,893,379 264,839,433 State and other public entities 22 79,673,372 49,329,012 528,652,043 405,418,445 Total liabilities 1,343,096,470 1,363,512,596
Total equity and liabilities 2,821,251,978 2,667,015,563
Consolidated Annual Report 2011 86
STATEMENT OF COMPREHENSIVE CONSOLIDATED INCOME AS OF 31 DECEMBER 2011 AND 2010
Am ounts in Euro 2011 2010 4th Quarter 2011 4 th Quarter 2010 (Unaudited) (Unaudited)
Retained earnings for the year without non -controlling interests 196.345.856 210.580.225 52.271.595 56.411.867
Fair value in derivative financial instruments (877.789) 2.090.813 (3.163.275) (1.806.386) Currency translation differences (1.367.491) 640.008 1.219.688 2.253.456 Actuari al gains / (loss es) (4.611.180) (128.931) 2.561.312 (942.460) Tax on items above when applicable 530.414 (476.254) (206.105) 596.888 Profit directly recognized in equity (6.326.046) 2.125.636 411.620 101.497
Total recognized income and expense for the year 190.019.810 212.705.861 52.683.215 56.513.364
Attributable to: Portucel 's shareholders 190.015.905 212.719.109 80.563.159 178.278.074 Non-controlling interests 3.905 (13.248) 23.532 18.716 190.019.810 212.705.861 80.586.691 178.296.790
Consolidated Annual Report 2011 87
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FROM 1 JANUARY 2010 TO 31 DECEMBER 2011
Gains/losses Dividends paid and Application of prior 31 December 2010 recognized in the reserves distributed Treasury shares 31 December 2011 year's net profit (Note 7) Amounts in Euro year (Note 25)
Share capital 767,500,000 - - - - 767,500,000 Treasury shares (26,787,706) - - (15,367,269) - (42,154,975) Fair value reserve 78,040 (601,284) - - - (523,244) Other reserves 47,005,845 - - - 10,540,737 57,546,582 Translation reserve 881,575 (1,367,491) - - - (485,916) Retained earnings 304,020,378 (4,346,709) - - 200,047,343 499,721,012 Net profit for the year 210,588,080 196,331,389 - - (210,588,080) 196,331,389 Total 1,303,286,212 190,015,905 - (15,367,269) - 1,477,934,848 Non-controlling interests 216,755 3,905 - 220,660 Total 1,303,502,967 190,019,810 - (15,367,269) - 1,478,155,508
Gains/losses Dividends paid and Application of prior 31 December 2009 recognized in the reserves distributed Treasury shares 31 December 2010 year's net profit (Note 7) Amounts in Euro year (Note 25)
Share capital 767,500,000 - - - - 767,500,000 Treasury shares (26,787,706) - - - - (26,787,706) Fair value reserve (1,456,243) 1,534,283 - - - 78,040 Other reserves 42,330,224 - - - 4,675,621 47,005,845 Translation reserve 241,567 640,008 - - - 881,575 Retained earnings 383,418,964 (43,262) (179,759,263) - 100,403,939 304,020,378 Net profit for the year 105,079,560 210,588,080 - - (105,079,560) 210,588,080 Total 1,270,326,366 212,719,109 (179,759,263) - - 1,303,286,212 Non-controlling interests 230,003 (13,248) - - - 216,755 Total 1,270,556,369 212,705,861 (179,759,263) - - 1,303,502,967
Consolidated Annual Report 2011 88 Translation of a report originally issued in Portuguese – Note 42
CONSOLIDATED STATEMENT OF CASH FLOWS AS OF 31 DECEMBER 2011 AND 2010
4th Quarter 4 th Quarter Amounts in Euro Notes 2011 2010 2011 2010 (Unaudited) (Unaudited) OPERATING ACTIVITIES Payments from customers 1,541,096,400 1,463,346,689 382,222,979 380,395,685 Payments to suppliers 1,163,973,302 1,155,853,247 232,618,421 290,600,091 Payments to personnel 99,055,053 109,150,271 44,030,922 47,012,229 Cash flow from operations 278,068,046 198,343,171 105,573,635 42,783,365
Income tax received / (paid) (25,790,587) (29,614,419) 2,722,593 (15,472,864) Other receipts / (payments) relating to operating activities 53,395,670 75,682,439 16,359,046 35,155,172
Cash flow from operating activities (1) 305,673,129 244,411,191 124,655,274 62,465,673
INVESTING ACTIVITIES Inflow s Financial investments - - - - Tangible Assets ---- Intangible assets (CO2 emission rights) - 10,604,340 - 6,051,980 Investment grants 5,474,411 30,150 (23,784) 30,150 Interest and similar income 6,525,765 7,042,208 3,517,120 545,582 Inflow s from investment activities (A) 12,000,176 17,676,698 3,493,336 6,627,712 Outflows Tangible assets 61,389,473 50,535,227 40,830,322 - Investments in associates 755,379 - - - Outflow s from investment activities (B) 62,144,852 50,535,227 40,830,322 -
Cash flow s from investment activities (2 = A - B) (50,144,676) (32,858,529) (37,336,986) 6,627,712
FINANCING ACTIVITIES Inflow s Borrow ings - 400,000,000 - 85,000,000 Inflow s from financing activities (C) - 400,000,000 - 85,000,000
Outflows Borrow ings 85,000,000 328,125,000 5,799,860 25,000,000 Interest and similar costs 21,688,378 22,258,740 8,181,482 7,017,954 Acquisition of treasury shares 24 15,367,269 - 3,782,251 - Dividends paid and distibuted reserves 14 - 179,759,263 - 117,682,498 Outflow s from financing activities (D) 122,055,647 530,143,003 17,763,592 149,700,452
Cash flow s from financing activities (3 = C - D) 122,055,647 (130,143,003) (17,763,592) (64,700,452)
CHANGES IN CASH AND CASH EQUIVALENTS (1)+(2)+(3) 133,472,805 81,409,658 69,554,696 4,392,934
CASH AND CASH EQUIV ALENTS AT THE BEGINNING OF THE YEAR 133,958,910 52,549,252 - -
CASH AND CASH EQUIV ALENTS AT THE END OF THE YEAR 29 267,431,715 133,958,910 69,554,696 4,392,934
Consolidated Annual Report 2011 89 Translation of a report originally issued in Portuguese – Note 42
preparation of the aforesaid financial statements are disclosed NOTES TO THE in Note 3. CONSOLIDATED FINANCIAL 1.2 Basis of Consolidation STATEMENTS 1.2.1. Subsidiaries AS OF 31 DECEMBER 2011 Subsidiaries are all entities over which the Group has the right (In these notes, unless indicated otherwise, all amounts are to determine their financial and operating policies, generally expressed in Euro) where the Group’s interest is represented by more than half of voting rights. The Portucel Group (“Group”) comprises Portucel – Empresa Produtora de Pasta e Papel, S.A. (hereafter referred to as the The existence and the effect of the potential voting rights Company or Portucel) and its subsidiaries. Portucel is a public which are currently exercisable or convertible are taken into company with the capital represented by shares and was account when the Group assesses whether it has control over incorporated on 31 May 1993, in accordance with Decree-Law another entity. no. 39/93, 13 February, following the restructuring of Portucel – Empresa de Celulose e Papel de Portugal, SA. Subsidiaries are consolidated under the full consolidation method since the date on which control is transferred to the Head Office: Mitrena, 2901-861 Setúbal Group while they are excluded at the date where control Share Capital: Euro 767,500,000 ceases. Registration No: 503 025 798 These companies’ shareholders equity and net income/loss The Group’s main business is the production and sale of corresponding to the third-party investment in such companies writing and printing paper and related products, and it is are presented under the caption of non-controlling interests present in all of the value added chain from research and respectively in the consolidated statement of the financial development of forestry and agricultural production, the position (in a separate component of shareholder’s equity) and purchase of wood and the production and sale of bleached in the consolidated income statement. The companies eucalyptus kraft pulp – BEKP and electric and thermal energy. included in the consolidated financial statements are disclosed in Note 39. These consolidated financial statements were approved by the Board of Directors on 30 January 2012. The purchase method is used in recording the acquisition of subsidiaries. The cost of an acquisition is measured by the fair The Group’s senior management, that is the members of the value of the assets transferred, the equity instruments issued Board of Directors who sign this report, declare that, to the and liabilities incurred or assumed on acquisition date, plus best of their knowledge, the information contained herein was costs directly attributable to the acquisition. prepared in conformity with the applicable accounting standards, providing a true and fair view of the assets and The identifiable assets acquired and the liabilities and liabilities, the financial position and results of the companies contingent liabilities assumed in a business combination are included in the Group’s consolidation scope. initially measured at fair value on the acquisition date, irrespective of the existence of non-controlling interests. The 1. Summary of the principal excess of the acquisition cost relative to the fair value of the accounting policies Group’s share of the identifiable assets and liabilities acquired is recorded as goodwill, as described in note 15.
The principal accounting policies applied in the preparation of If the acquisition cost is less than the fair value of the net these consolidated financial statements are described below. assets of the acquired subsidiary (negative goodwill or
Badwill), the difference is recognised directly in the income The accounting policies related to brands and financial statement in the period where it takes place. instruments / instruments held to maturity are not applicable to the presented financial statements. However, they are Transaction costs directly attributable are immediately included to ensure completeness compared to the accounting expensed. policies applied by the parent company – the Semapa Group.
Intercompany transactions, balances, unrealised gains on 1.1 Basis of preparation transactions and dividends distributed between group
companies are eliminated. Unrealised losses are also The Group’s consolidated financial statements have been eliminated, except where the transaction displays evidence of prepared in accordance with International Financial Reporting impairment of a transferred asset. Standards adopted by the European Union (IFRS – formerly referred to as the International Accounting Standards - IAS ) The subsidiaries’ accounting policies have been adjusted issued by the International Accounting Standards Board whenever necessary so as to ensure consistency with the (IASB) and the interpretations issued by the International policies adopted by the Group. Financial Reporting Interpretations Committee (IFRIC) or by the former Standing Interpretations Committee (SIC) in force 1.2.2. Associates on the date of preparation of the mentioned financial statements. Associates are all the entities in which the Group exercises
significant influence but does not have control, generally The accompanying consolidated financial statements were applied in the case of investments representing between 20% prepared on the going concern basis from the accounting and 50% of the voting rights. Investments in associates are books and records of the companies included in the equity accounted. consolidation (Note 39), and under the historic cost convention, except for biological assets, and financial In conformity with the equity accounting method, financial instruments which are recorded at fair value (Notes 31 and investments are recorded at their acquisition cost, adjusted by 18). the amount corresponding to the Group’s share of changes in
the associates’ shareholders’ equity (including net The preparation of the financial statements requires the use of income/loss) with a corresponding gain or loss recognised for important estimates and judgments in the application of the the period on earnings or on changes in capital, and by Group’s accounting policies. The principal statements which dividends received. involve a greater degree of judgment or complexity, or the most significant assumptions and estimates used in the
Consolidated Annual Report 2011 90 Translation of a report originally issued in Portuguese – Note 42
The difference between the acquisition cost and the fair value 1.4.2. Balances and transactions expressed in foreign of the assets and liabilities attributable to the affiliated currencies company on the acquisition date is, if positive, recognised as Goodwill and recorded as investments in affiliated companies. All Group’s assets and liabilities denominated in foreign If negative, goodwill is recorded as income for the period under currencies were converted into euro using the exchange rates the caption “Group share of (loss) / gains of associated ruling at the statement of financial position’s date. companies and joint ventures”. Currency differences, favourable and unfavourable, arising Costs directly attributable to the transaction are immediately from differences between the exchange rates ruling at the expensed. transaction date and those ruling on collection, payment or statement of financial position’s date, were recorded as Unrealized gains on transactions with associates are income and costs in the consolidated income statement for the eliminated to the extent of the Group’s investment in the year. associates. Unrealised losses are also eliminated, except where the transaction reveals evidence of impairment’s 1.4.3. Group companies existence on the transferred assets. The results and the financial position of the Group’s entities The associates’ accounting policies used in the preparation of which have a different functional currency from the Group’s the individual financial statements are adjusted, whenever reporting currency are converted into the reporting currency as necessary, so as to ensure consistency with the policies follows: adopted by the Group. (i) The assets and liabilities of each Statement of financial 1.3 Segmental reporting position are translated at the exchange rates ruling at the date of the financial statements; Operating segment is a group of assets and operations of the Group whose financial information is used in the decision (ii) If materially relevant, the income and costs are making process developed by the Group’s management. converted at the exchange rate ruling on the transaction dates. Otherwise, income and expenses for The operating segments are presented on these financial each income statement are translated at the average statements in the same way as internally used for the Group’s exchange rate of the months of the reporting period performance evaluation. Exchange differences resulting from item (i) above are Four operating segments have been identified by the Group: recognised as a separate equity component, under the uncoated printing and writing paper – UWF, bleached currency translation reserve heading, and from item (ii) as eucalyptus kraft pulp – BEKP, forestry and power generation. financial costs.
BEKP, electric energy and UWF paper are produced by the 1.5 Intangible assets Group in two plants located in Figueira da Foz and Setúbal. BEKP and energy are also produced in another plant located Intangible assets are booked at acquisition cost less in Cacia. accumulated amortisation and impairment losses, by the straight-line method over a period between 3 and 5 years and Wood and cork are produced from woodlands owned or leased annually for CO2 emission rights. by the Group in Portugal. The production of cork and pinewood are sold to third parties while the eucalyptus wood is mainly 1.5.1. CO2 emission rights consumed in the production of BEKP. The CO2 emission rights attributed to the Group within the A significant portion of the Group’s own BEKP production is National Plan for the assignment of CO2 emission licences at consumed in the production of UWF paper. Sales of both no cost, are recognised under Intangible Assets at market products (BEKP and UWF) are destined to 115 countries value on the award date, with a corresponding liability being throughout the world. recorded under “Deferred income – grants”, for the same amount. Power generation, steam and electricity, is mainly produced from bio fuels in cogeneration. Steam production is used for The Group records as an operating cost with a corresponding internal consumption while electricity is sold to the national liability generated in the period and an operating income as a energy network. result of the recognition of the proportion of the corresponding subsidy. The accounting policies used in segmental reporting are those consistently used in the Group. All inter-segmental sales and Sales of emission rights give rise to a gain or a loss, for the services rendered are made at market prices and eliminated difference between the amount realised and the respective on consolidation. initial recognition cost, net of the corresponding State subsidy, which is recorded as “Other operating income” or “Other Segmental information is disclosed in Note 4. operating costs”, respectively.
At the date of the consolidated statement of financial position, CO2 emission rights’ portfolio is valued at the lower of the 1.4 Foreign currency translation acquisition or their market value. On the other hand, liabilities due for those emissions are valued at market value at the 1.4.1. Functional and reporting currency same date.
The items included in the financial statements of each one of 1.5.2. Brands the Group’s entities are measured using the currency of the economic environment in which the entity operates (functional Whenever brands are identified in a business combination, the currency). Group records them separately in the consolidated statements as an asset at historical cost, which represents their fair value The consolidated financial statements are presented in Euro, on the acquisition date. which is the Group’s functional and reporting currency. On subsequent valuation, brands are measured in the Group’s consolidated financial statements at cost less accumulated amortization and impairment losses.
Consolidated Annual Report 2011 91 Translation of a report originally issued in Portuguese – Note 42
Non-current assets which do not have a defined useful life are Own brands are not shown in the Group’s financial statements, not subject to depreciation, but are subject to annual since they represent internally generated intangible assets. impairment tests. Assets subject to depreciation are reviewed for impairment whenever events or changes in circumstances 1.6 Goodwill indicate that the amount at which they are shown in the accounts may not be recoverable.
Goodwill represents the excess of the cost of an acquisition An impairment loss is recognised as the amount of the excess over the fair value of the Group’s share of the net identifiable of the asset’s book value over its recoverable amount. The assets and liabilities of the acquired subsidiary/associate at the recoverable amount is the higher of the net sales price and its date of acquisition. Goodwill on acquisitions of subsidiaries is value in use. For the purpose of conducting impairment tests, included in intangible assets. Goodwill on acquisitions of the assets are grouped at the lowest level for which cash flows associates is included in investments in associates. can be identified separately (cash generating units which belong to the asset), when it is not possible to do so Goodwill on acquisitions of subsidiaries and associates is not individually for each asset. amortised and is tested annually for impairment. Impairment losses relative to goodwill cannot be reversed. Gains or losses The reversal of impairment losses recognised in previous on the disposal of an entity include the carrying amount of periods is recorded when it can be concluded that the goodwill relating to that entity. recognised impairment losses no longer exist or have decreased (with the exception of impairment losses relating to 1.7 Property, plant and equipment Goodwill – see Note 1.6). This analysis is made whenever there are indications that the impairment loss formerly Property, plant and equipment are recorded at the acquisition recognised has been reversed or reduced. cost or the revaluated acquisition cost, in accordance with the prevailing legislation, the accounting principles generally The reversal of impairment losses is recognised in the income accepted in Portugal until 1 January 2004 (transition date to statement as other operating income, except for the available- IFRS), deducted of depreciation and impairment losses. for-sale financial assets (Note 1.10.4), unless the asset has been revaluated, in which case the reversal will represent a Property, plant and equipment acquired after the transition portion or the total of the revaluation amount. However, an date are shown at cost, less depreciation and impairment impairment loss is reversed only up to the limit of the amount losses. The acquisition cost includes all expenditure directly that would be recognised (net of amortisation or depreciation) attributable to the acquisition of the assets, their transport to if it had not been recognised in prior years. the place where they are to be used and operations to put them in the desired operating conditions. 1.9 Biological assets
Subsequent costs are included in asset’s carrying amount or Biological assets are measured at fair value, less estimated recognised as a separate asset, as appropriate, only when it is costs to sell at the time of harvesting. The Group’s biological probable that future economic benefits will flow to the Group assets comprise the forests held for the production of timber, and the respective cost can be reliably measured. suitable for incorporating in the production of BEKP, but also include other species like pine or cork oak. Planned maintenance costs are considered part of the asset’s acquisition cost and therefore, they are entirely depreciated When calculating the fair value of the forests, the Group uses until the date of the next forecasted maintenance event. the discounted cash flows method, based on a model developed in house, regularly tested by independent external All other repairs and maintenance costs, other than the assessments, which considers assumptions about the nature planned maintenance, are charged to the income statement in of the assets being valued, namely, the expected yield of the the financial period in which they are incurred. forests, the timber selling price deducted by costs relating to harvest and transportation, the rents of the woodlands and Depreciation is calculated on acquisition cost, mainly using the also plantation costs, maintenance costs and a discount rate. straight line method from the date the assets are ready to enter into service, at the depreciation rates that best reflect The discount rate was determined on the basis of the Group’s their estimated useful lives, as follows: expected rate of return on its forests.
Average useful life Fair value adjustments resulting from changes in estimates of (in years) growth, growth period, price, cost and other assumptions are recognised as operating income/ costs in the caption “Change Buildings and other constructions 12 – 30 in the fair value of biological assets”. Equipment: Machinery and equipment 6 – 25 At the time of harvest, wood is recognised at fair value less Transportation equipment 4 – 9 estimated costs at point of sale, in this case, the pulp mills. Tools and utensils 2 – 8 Administrative equipment 4 – 8 1.10 Financial Instruments Returnable containers 6
Other property, plant and equipment 4 – 10 The Group classifies its financial instruments in the following
categories: loans and receivables, financial assets at fair value The residual values of the assets and respective useful lives through profit and loss, held-to-maturity investments, and are reviewed and adjusted when necessary at the date of the available-for-sale financial assets. statement of financial position. If the book value of the asset is higher than the asset’s realisable value, then this is written The classification depends on the intention motivating the down to the estimated recoverable amount by the recording of instruments’ acquisition. Management determines the impairment losses (Note 1.8). classification at the moment of initial recognition of the instruments and reappraises this classification on each Gains or losses arising from derecognition or disposal are reporting date. calculated as the difference between the proceeds received on disposal and the asset’s book value, and are recognised in the All acquisitions and disposals of these instruments are income statement as other operating income or costs. recognised at the date of the relevant purchase and sale
contracts, irrespective of the financial settlement date. 1.8 Impairment of non-current assets
Consolidated Annual Report 2011 92 Translation of a report originally issued in Portuguese – Note 42
Financial instruments are initially recorded at the acquisition assets is impaired. If a prolonged decline in fair value of the cost, while fair value is equal to the price paid, including available-for-sale financial assets occurs, then the cumulative transaction expenses. The subsequent measurement depends loss – measured as the difference between the acquisition cost on the category the instrument falls under, as follows: and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is 1.10.1. Loans granted and receivables removed from equity and recognised in the income statement.
Loans and accounts receivable are non-derivative financial An impairment loss recognised on available-for-sale financial assets with fixed or determinable payments and which are not assets is reversed if the loss was caused by specific external quoted in an active market. They originate when the Group events of an exceptional nature that are not expected to recur advances money, goods or services directly to a debtor but which subsequent external events have reversed; under without any intention of negotiating the debt. these circumstances, the reversal does not affect the income statement and the asset’s subsequent increase in value is thus They are included in current assets, except where their taken to the fair value reserve. maturity exceeds 12 months after the statement of financial position date, in which case they are classified as non-current 1.11 Derivative financial instruments assets. Occasionally, when considered appropriate, the Group uses Loans granted and receivables are included in “Receivables derivative financial instruments aimed at managing the and other current assets” in the statement of financial position financial risks to which it is exposed. (Note 21). The use of these instruments occurs whenever expectations of 1.10.2. Financial assets at fair value through profit or changes in interest or exchange rates justify it, as the Group loss seeks to hedge against adverse movements through derivative instruments, such as interest rate swaps (IRS), caps and This category comprises two sub-categories: (i) financial floors, forwards, calls, collars, etc. assets held for trading, and (ii) assets designated at fair value through profit or loss at initial recognition. A financial asset is In the selection of derivative financial instruments, it is their classified under this category if acquired primarily for the economic aspects that are the main focus of assessment. purpose of selling in the short-term or if so designated by management. Transactions that qualify as cash-flow hedges are recognised in the statement of financial position at fair value. Assets in this category are classified as current if they are either held for trading or are expected to be realised within 12 To the extent that, in accordance with prevailing accounting months of the date of the statement of financial position. These standards, they are considered effective hedges, changes in investments are measured at fair value through the income the fair value of those instruments are initially recorded as an statement. offset to shareholders’ equity and subsequently reclassified under the financial costs heading, on the settlement date. 1.10.3. Held-to-maturity investments Accordingly, in net terms, the costs associated with the Held-to-maturity investments are non-derivative financial hedged items are accrued at the inherent hedging transaction assets, with fixed or determinable payments and fixed rate contracted. Gains or losses arising from the premature maturities that the Group’s management has the positive cancellation of this type of instrument are taken to the income intention and ability to hold to maturity. Investments in this statement at the time they arise. category are recorded at amortised cost using the effective interest rate method. Although the derivatives contracted by the Group represent effective instruments to cover business risks, not all of them 1.10.4. Available-for-sale financial assets qualify as hedging instruments in accounting terms to satisfy the rules and requirements of IAS 39. Instruments that do not Available-for-sale financial assets are non-derivative financial qualify as hedging instruments in accounting terms are stated assets that: (i) the Group has the intention of holding for an on the statement of financial position at fair value and changes undefined period of time, (ii) are designated as available-for- in same are recognised in financial costs. sale at initial recognition or (iii) do not meet the conditions to be classified in any of the remaining categories, as described Whenever possible, the fair value of derivatives is estimated above. on the basis of quoted instruments. In the absence of market prices, the fair value of derivatives is estimated through the These financial instruments are recognised at market value, as discounted cash-flow method and option valuation models, in quoted at the date of the statement of financial position. accordance with prevailing market assumptions.
If there is no active market for a financial asset, the Group The fair value of the derivative financial instruments is included establishes fair value by using valuation techniques. These in Receivables and other current assets and Payables and include the use of recent arm’s length transactions, reference other current liabilities. to other instruments that are substantially the same to the one in question, discounted cash-flows analysis and option pricing 1.12 Corporate Income Tax models refined to reflect the issuer’s specific circumstances. Corporate income tax includes current and deferred tax. Potential gains and losses arising from these instruments are Current income tax is calculated based on net income, recorded directly in the fair value reserve (shareholders’ adjusted in conformity with tax legislation in force at the date of equity) until the financial investment is sold, received, or the statement of financial position. disposed of in any way, at which time the accumulated gain or loss formerly reflected in fair value reserve is taken to the Deferred tax is calculated using the liability method, based on income statement. the temporary differences between the book values of the assets and liabilities and their respective tax base. The income If there is no market value or if it is not possible to determine tax rate expected to be in force in the period in which the one, these investments are recognised at their acquisition temporary differences will reverse is used in calculating cost. deferred tax.
At each reporting date the Group assesses whether there is Deferred tax assets are recognised whenever there is a objective evidence that a financial asset or group of financial reasonable likelihood that future taxable profits will be
Consolidated Annual Report 2011 93 Translation of a report originally issued in Portuguese – Note 42 generated against which they can be offset. Deferred tax shareholders’ equity attributable to the holders of the parent assets are revised periodically and decreased whenever it is company’s capital until such time the shares are cancelled, likely that tax losses will not be utilised. redeemed or sold.
Deferred taxes are recorded as a cost or incomeWhen for thesuch year, shares When such shares are subsequently sold or repurchased, any except where they result from amounts recorded directly under proceeds, net of the directly attributable transaction costs and shareholders’ equity, situation in which deferred tax is also taxes, is reflected in the shareholders’ equity of the company’s recorded under the same caption. shareholders, under other reserves.
Tax benefits attributed to the Group regarding its investment 1.17 Interest bearing liabilities projects are recognised through the income statement as there is sufficient taxable income to allow its use. Interest-bearing liabilities are initially recognised at fair value, net of the transaction costs incurred, and are subsequently The amounts to be included in the current tax and in the stated at their amortised cost. Any difference between the deferred tax, resulting from transactions and events amounts received (net of transaction costs) and the repayment recognised in reserves, are recorded directly in these same amount is recognised in the income statement over the term of headings, not affecting the net profit for the period. the debt, using the effective interest rate method.
1.13 Inventories Interest-bearing debt is classified as a current liability, except where the Group has an unconditional right to defer the Inventories are valued in accordance with the following criteria: settlement of the liability for at least 12 months after the balance sheet date. i) Goods and raw materials 1.18 Borrowing Costs Goods and raw, subsidiary and consumable materials are valued at the lower of their purchase cost or their net realisable Borrowing costs relating to loans are usually recognised as value. The purchase cost includes ancillary costs, and it is financial costs, in accordance with the accrual principle and determined using the weighted average cost as the valuation the effective interest rate method. method. Financial costs on loans directly related to the fixed assets ii) Finish products and work in progress acquisition, construction or production, are capitalised, to form part of the asset’s cost. Capitalisation of these charges begins Finished and intermediate products and work in progress are once preparations are started for the construction or valued at the lower of their production cost (which includes development of the asset and is suspended after its utilisation incorporated raw materials, labour and general manufacturing begins or when the respective project is suspended. costs, based on a normal production capacity level) or their net realisable value, excluding any storage (warehousing), Any financial income generated by loans that are directly logistical and selling costs. associated with a specific investment is deducted from financial costs eligible for capitalisation. The net realisable value corresponds to the estimated selling price after deducting estimated completion and selling costs. 1.19 Provisions The differences between costs and net realisable value, if lower, are recorded in Inventories consumed and sold. Provisions are recognised whenever the Group has a present legal or constructive obligation, as a result of past events, in 1.14 Receivables and other current assets which it is probable that an outflow of resources will be required to settle the obligation and the amount has been Debtors’ balances and other current assets are recorded at fair reliably estimated. value and are subsequently recognized at their amortised cost, net of impairment losses, so as to state them at their expected Provisions for future operating losses are not recognised. net realisable value (Note 24). Provisions are reviewed on the date of the statement of financial position and are adjusted to reflect the best estimate Impairment losses are recorded when there is objective at that date. evidence that the Group will not receive the full amount outstanding in accordance with the original conditions of the The Group incurs expenditure and assumes liabilities of an accounts receivable. environmental nature. Accordingly, expenditures on equipment and operating techniques that ensure compliance with applicable legislation and regulations (as well as on the 1.15 Cash and cash equivalents reduction of environmental impacts to levels that do not exceed those representing a viable application of the best Cash and cash equivalents includes cash, bank accounts and available technologies, on those related to minimizing energy other short-term investments with an initial maturity of up to 3 consumption, atmospheric emissions, the production of months which can be mobilised immediately without any residues and noise), are capitalized when they are intended to significant risk of fluctuations in value. serve the Group’s business in a durable way, as well as those associated with future economic benefits and which serve to 1.16 Share capital and treasury shares prolong life expectancy, increase capacity or improve the safety or efficiency of other assets owned by the Group. Ordinary shares are classified in shareholders’ equity.
Costs directly attributable to the issue of new shares or other 1.20 Pensions and other post-employment equity instruments are reported as a deduction, net of taxes, benefits from the proceeds of the issue. 1.20.1. Defined benefit pension plans and retirement Costs directly attributable to the issue of new shares or options bonus for the acquisition of a new business are included in the acquisition cost as part of the purchase consideration. Some of the Group’s subsidiaries have assumed the When any Group company acquires shares of the parent commitment to make payments to their employees in the form company (treasury shares), the payment, which includes of complementary retirement pensions, disability, early directly-attributable incremental costs, is deducted from the
Consolidated Annual Report 2011 94 Translation of a report originally issued in Portuguese – Note 42 retirement and survivors’ pensions, having constituted defined- statement of financial position is shown under the caption benefit plans. “Payables and other current liabilities”.
As referred to in Note 27, the Group constituted autonomous 1.21 Payables and other current liabilities Pension Funds as a means of funding most of the commitments for such payments. Trade creditors and current accounts payable are initially recorded at their fair value and subsequently at amortised Portucel assumed the obligation to pay a retirement bonus, cost. equivalent to six-month salary, for employees that retire at the regular date of retirement, 65 years old. The present value of 1.22 Government grants the liabilities for future retirement payments and bonuses are determined on an actuarial basis and recorded as a cost of the Government grants are recognised at their fair value when period in line with the services provided by the potential there is a reasonable assurance that the grant will be received beneficiaries in their employment, in accordance with IAS 19. and the group will comply with all required conditions.
As such, the total liability is estimated separately for each plan Government grants received to compensate capital at least once every six months, on the date of closing of the expenditures, are reported under the caption “Payables and interim and annual accounts, by a specialised and other current liabilities” and are recognised in the income independent entity in accordance with the projected unit credit statement during the estimated useful life of the granted asset, method. by deducting the value of its amortisation.
Past service costs resulting from the implementation of a new Government grants related to costs are deferred and plan, or increases in the benefits awarded are recognised recognised in the income statement over the period that immediately in situations where the benefits are to be paid or matches the costs with the compensating grants. are past due. Grants related to biological assets carried at fair value, in The liability thus determined is stated in the statement of accordance with IAS 41, are recognised in the income financial position, less the market value of the funds set up as statement when the terms and conditions of the grant are met. a liability, under Post-employment benefit liabilities, when underfunded, and as an asset in situations of over-funding. 1.23 Leases
Actuarial gains and losses resulting from differences between Fixed assets acquired under leasing contracts, as well as the the assumptions used for purposes of calculating the liabilities corresponding liabilities, are recorded using the financial and what effectively occurred (as well as from changes made method. thereto and from the difference between the expected amount of the return on the funds’ assets and the actual return) are According to this method, the asset’s cost is recorded in recognised when incurred directly in shareholders’ equity. property, plant and equipment and the corresponding liability is recorded under liabilities as loans, while the interest included Gains and losses generated on a curtailment or settlement of a in the instalments and the asset’s depreciation, calculated as defined benefit pension plan are recognised in the income described in Note 1.7, are recorded as costs in the income statement when the curtailment or settlement occurs. statement of the period to which they relate.
A curtailment occurs when there is a material reduction in the Leases, under which a significant part of the risks and benefits number of employees or the plan is altered in such a way that of the property is assumed by the lessor, with the Group being the benefits awarded are reduced with a material impact. the lessee, are classified as operating leases. Payments made under operating leases, net of any incentives received by the 1.20.2. Defined contribution plans lessee, are recorded in the income statement during the period of the lease. Some of the Group’s subsidiaries have assumed commitments, regarding contributing to a defined contribution 1.23.1. Leases included in contracts according to plan with a percentage of the beneficiaries’ salary, in order to IFRIC4 provide retirement, disability, early retirement and survivors’ pensions. The Group recognizes an operating or financial lease whenever it enters into an agreement, encompassing a In order to capitalize those contributions, pension funds were transaction or a series of related transactions which even if not set up, for which employees can make additional voluntary in the legal form of a lease, transfers a right to use an asset in contributions. return for a payment or a series of payments.
Therefore, the responsibility with these plans corresponds to 1.24 Dividends distribution the contribution made to the funds based on the percentage of the employees’ salaries defined in the respective agreements. The distribution of dividends to shareholders is recognised as These contributions are recognized as a cost in the income a liability in the Group’s financial statements in the period in statement in the period to which they refer, regardless of the which the dividends are approved by the shareholders and up date of the settlement of the liability. until the time of their payment.
1.20.3. Holiday pay, allowances and bonuses
Under the terms of the prevailing legislation, employees are entitled annually to 25 working days leave, as well as to a 1.25 Revenue recognition and accrual basis month’s holiday allowance, entitlement to which is acquired in the year preceding its payment. Group companies record their costs and income according to the accrual principle, so that costs and income are recognised According to the current Performance Management System as they are generated, irrespective of the time at which they (“Sistema de Gestão de Desempenho”), employees have the are paid or received. right to a bonus based on annually-defined objectives. The differences between the amounts received and paid and Accordingly, these liabilities are recorded in the period in which the respective costs and income are recognised in the the employees acquire the respective right, irrespective of the “Receivables and other current assets” and “Payables and date of payment, whilst the balance payable at the date of the other current liabilities” headings (Notes 21 and 30, respectively).
Consolidated Annual Report 2011 95 Translation of a report originally issued in Portuguese – Note 42
New standards and interpretations not mandatory as at 31 Income from sales is recognised in the consolidated income December 2011: statement when the risks and benefits inherent in the ownership of the respective assets are transferred to the There are new standards, interpretations and amendments of purchaser and the income can be reasonably quantified. Thus, existing standards that, despite having already been sales of products (BEKP and UWF paper) are recognized only published, they are only mandatory for the periods starting when they are dispatched to the client. after 1 January 2011, which the Group decided not to early- adopt in the current period, as follows: Sales are recognised net of taxes, discounts and other costs inherent to their completion, at the fair value of the sum Standarts not yet approved by the European Comission Effective date * received or receivable. IFRS 1 - First-time adoption of IFRS 1 July 2011 IFRS 7 - Financial Instruments - Disclosures 1 July 2011 IAS 12 (revised) - Income taxes 1 January 2012 Income from services rendered is recognised in the IAS 1 (ateração) - Presentation of Financial Statements 1 January 2012 consolidated income statement by reference to the stage of IFRS 9 (new ) - Financial Statements - Classifications and measurement 1 January 2013 IFRS 10 (new ) - Consolidated Financial Statements 1 January 2013 fulfilment of service contracts at the date of the statement of IFRS 11 (new ) - Joint Agreements 1 January 2013 financial position. IFRS 12 (new ) - Disclosures of interests in other entities 1 January 2013 IFRS 13 (new ) - Fair Value: Measurement and Disclosure 1 January 2013 Dividend income is recognised when the owners or IAS 27 (revision 2011) - Separated Financial Statements 1 January 2013 IAS 28 (revision 2011) - Investmentes in associates and joint ventures 1 January 2013 shareholders entitlement to receive payment is established. IAS 19 (revisão 2011) - Employee Benefits 1 January 2013 IFRS 7 (amendment) - Disclosures - offsetting financial assets and liabilities 1 January 2013 Interest receivable is recognised according to the accrual IAS 32 (amendment) - Offset of financial assets and liabilities 1 January 2014 principle, considering the amount owed and the effective * Periods beginning on or after interest rate during the period to maturity. Up to the date of issuing this report, the Group had not 1.26 Contingent assets and liabilities concluded the estimate of the effects of the changes arising from the adoption of these standards, for which it decide not to
early-adopt them. However, no material effect is expected in Contingent liabilities in which the probability of an outflow of the financial statements as a result of their adoption. funds affecting future economic benefits is not likely, are not recognised in the consolidated financial statements, and are disclosed in the notes, unless the probability of the outflow of 2. Risk Management funds affecting future economic benefits is remote, in which case they are not the object of disclosure. Provisions are The Group operates in the forestry sectors, in the production of recognised for liabilities which meet the conditions described in eucalyptus for use in the production of BEKP (bleached note 1.19. eucalyptus kraft pulp), which is essentially incorporated in the production of UWF (uncoated woodfree) paper but is also sold Contingent assets are not recognised in the consolidated in the market, and in energy production, essentially through financial statements but are disclosed in the notes when it is the forest biomass that is generated in the BEKP production probable that a future economic benefit will arise from process. them(Note 37). All the activities in which the Group is involved are subject to 1.27 Subsequent events risks which could have a significant impact on its operations, its operating results, the cash flow generated and in its Events after the date of the statement of financial position financial position. which provide additional information about the conditions prevailing at the date of the statement of financial position are The risk factors analysed in this chapter can be structured as reflected in the consolidated financial statements. follows:
Subsequent events which provide information about conditions i. Specific risks inherent to the sectors of activity in which occur after the date of the statement of financial position which the Group operates: are disclosed in the notes to the consolidated financial 9 Risks associated with the forestry sector statements, if material. 9 Risks associated with the production and sale of BEKP and UWF paper 1.28 New standards, changes and 9 Risks associated with energy generation interpretations of existing standards 9 General context risks ii. Group risks and the manner in which it carries out its
activities. The application of the interpretations and amendments to the standards mentioned below, are mandatory by the IASB for the financial years that begin on or after 1 January 2011:
New Standards Effective date * The Group has a risk-management programme which is IAS 24 (revised) - Related parties 1 January 2011 focused on the analysis of the financial markets in order to IAS 32 (revised) - Financial Instruments : Presentation - Classification of rights issued 1 January 2011 minimize the potential adverse effects on its financial IFRS 1 (revised) - First-time adoption of IFRS 1 January 2011 performance. Risk management is conducted by the Finance * Periods beginning on or after Division in accordance with policies approved by the Board of
Annual improvement of standards in 2010 (effective for annual Directors. The Finance Division evaluates and undertakes the financial periods beginning on 1 January 2011) Effective date * hedging of financial risks in strict coordination with the Group’s operating units. IFRS 1 - First-time adoption of IFRS 1 January 2011 IFRS 3 - Business Combinations 1 January 2011 IFRS 7 - Financial Instruments - Disclosures 1 January 2011 The Board of Directors provides the principles of risk IAS 1 - Presentation of financial statements 1 January 2011 management as a whole and policies covering specific areas IAS 27 - Consolidated and separated financial statements 1 January 2011 IAS 34 - Interim Financial Report 1 January 2011 such as foreign exchange risk, interest rate risk, liquidity risk, IFRIC 13 - Customer Loyalty Programs 1 January 2011 credit risk, the use of derivatives and other non-derivate * Periods beginning on or after financial instruments and the investment of excess liquidity. The internal audit department follows the implementation of The introduction of these interpretations and changes to the the risk management principles defined by the Board of rules given above do not have significant impacts on the Directors. statements of the Group.
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2.1 Specific risks in sectors where the Group grouping manages an annual budget of some 2 million euro, acts and has created an efficient and flexible structure which implements practices aimed at reducing protection costs and minimizing the losses by forest fires for the members of the 2.1.1. Significant risks from the forestry sector grouping, which own and manage more than 250 thousand hectars of forests in Portugal. The Portucel Soporcel group carries out the management of woodlands covering an area of some 120 thousand hectars of 2.1.2. Risks associated to producing and selling UFW land, from north to south of the country, according to the paper and BEKP principles laid down in its Forestry Policy. Eucalyptus trees occupy 72% of this area, namely the Eucalyptus globulus, the Supply of raw materials species that is universally acknowledged as the tree with the ideal fibre for producing high quality paper. The supply of wood, namely eucalyptus, is subject to price fluctuations and difficulties encountered in the supply of raw The main risk factor threatening the eucalyptus forests lies in materials that could have a significant impact on the the low productivity of Portugal’s forests and in the worldwide production costs of companies producing BEKP (Bleached demand for certified products, considering that only a small Eucalyptus Kraft Pulp). proportion of the forests is certified. It is expected that this competitive pressure will remain in the future. As an example, The planting of new areas of eucalyptus and pine is subject to the forestry area managed by the Group represents less than the authorization of the relevant entities, so that increases in 3.5% of Portugal’s total forested area and 54% of all certified forested areas, or the substitution of some of the currently Portuguese forests, according to the FSC standard. used areas depend on forest owners which are estimated in some 400,000, on the applicable legislation and the speed of The main risks associated with the sector are the risk attached the responsible authorities in approving the new projects. If to the productive capacity of the plantations and the risk of domestic production proved to be insufficient, in volume and in wildfires. In order to maximise the productive capacity of the quality, namely of certified wood, the Group could have to areas it manages, the Group has developed and employs place greater reliance on the importation of wood. Forestry Management models which contribute to the maintenance and ongoing improvement of the economic, Regarding the importation of wood, there is a risk related to its ecological and social functions of the forestry areas, not only shipment from the place of origin to the harbours and to the regarding the population but also from the forestry landscape Group’s mills. This transportation risk is reduced by the agreed perspective, namely: purchasing conditions, where the ownership of raw materials is transferred at the port of arrival, and complemented by i. Increase the productivity of its woodlands through insurance coverage of potential supplying losses caused by the use of the best agro-forestry practices adapted any transportation accident that may affect the supplying of to local conditions and compatible with the wood. environment. ii. Establish and improve the network of forestry The Group seeks to maximize the added value of their infrastructures to enable the required accessibility products, particularly through increased integration of certified for management, whilst making them compatible wood in these products. with the forestry protection measures against wildfires. The low expression of this wood outside the forests directly iii. Ensure compliance with the water-cycle functions, managed by the Group, has meant a shortage of supply to promoting, whenever possible, the rehabilitation and which the Group has responded with an increase in the price qualitative protection of water resources. offered when comparing to wood originating from forests that are not certified. The Group also has a research institute, Raíz, whose activity is focused in 3 main areas: Applied Research, Consulting and Furthermore, and considering the unsurpassable National Training. In the forestry research area, Raíz seeks: Value Added in the Portuguese Economy, direct and indirect, of the eucalyptus industry, as well as the significance of such i. To improve the productivity of the eucalyptus forests industries for exports, the level of employment they provide ii. To enhance the quality of the fibre produced and the increasing demand for eucalyptus, not easily satisfied iii. To implement a sustained forestry management by national forests, the Group has been making the program from an economic, environmental and Government and the public opinion aware that it is necessary social perspectives to guarantee that, whilst the internal production of this type of iv. To lower the cost of wood wood does not increase significantly on an economically viable basis, its use as bio fuels for energy production should not be Regarding the risk of wild fires, the manner in which the put ahead of its use as a raw material, to be used to produce Group manages its woodlands constitutes the front line for tradeable goods. mitigating this risk. Most of the Group’s forestry resources are certified by the FSC (Forest Stewardship Council), a In the year ended 31 December 2011, an increase of Euro 5 certification programme which guarantees that the Company’s on the cost of a cubic meter of the eucalyptus wood consumed forests are managed in a responsible manner from an in the production of BEKP, would have had an impact in environmental, economic and social standpoint, complying Group’s earnings of some Euro 21,000,000. with stringent and internationally-recognised criteria. The production process depends on the constant supply of Amongst the various management measures to which the steam and electric energy. For this, the Group owns several Group has committed under this program, the strict cogeneration units that ensure this constant supply. A compliance for the biodiversity rules and the construction and contingent plan with redundancies between the different power maintenance of access roads and routes to each of the generation units is in place in order to reduce the risk of failure operational areas assume particular importance in mitigating of the power supply to the pulp and paper mills. the risk of wild fires. Market Price for UWF paper and BEKP Moreover, the Group has a stake in the Afocelca grouping – a complementary corporate grouping (CCG) between the The market prices of BEKP and UWF paper are defined in the Portucel Group and the ALTRI Group, whose mission is to world global market in perfect competition and have a provide assistance to the fight against forest fires at the significant impact on the Group’s revenues and on its grouped companies’ land holdings, in close coordination and profitability. Cyclical fluctuations in BEKP and in UWF Paper collaboration with the National Civil Protection Authority prices mainly arise from changes in the world supply and (Autoridade Nacional de Protecção Civil – ANPC). This
Consolidated Annual Report 2011 97 Translation of a report originally issued in Portuguese – Note 42 demand, the financial situation of each of the international the distribution capacity as well as selling prices, as a market players (producers, traders, distributors, clients, etc.), consequence of entering in new markets. creating imbalances in supply, in the face of market demand raising market volatility. Concentration of the customer portfolio
The BEKP and UWF paper markets are highly competitive. At 31 December 2011, the Group’s 10 main BEKP group of Significant variations in existing production capacities could customers accounted for 14% of the period’s production of have a strong influence on world market prices. These factors BEKP and 74% of external sales of BEKP. This ratio is a result have encouraged the Group to follow a defined marketing and of the strategy pursued by the Group, consisting of a growing branding strategy and to invest in relevant capital expenditure integration of the BEKP produced into the UWF paper to increase productivity and the quality of the products it sells. produced and commercialized.
In the year ended 31 December 2011, a 10% drop in the price As such, the Group considers that there is little exposure to the per ton of BEKP and of 5% in the price per ton of UWF paper risks of customer concentration regarding the sale of BEKP. sold by the Group in the period, would have represented an impact on its earnings of about Euro 14,000,000 and Euro At 31 December 2011, the Group’s 10 main groups of 58,000,000. customers for UWF paper represented 58% of this product’s sales during the period. Also regarding UWF paper, the Group Demand for the Group’s products follows a strategy of mitigating the risk of customer concentration. The Group sells UWF paper to more than 100 Not withstanding that refers to the concentration of the countries, thereby allowing a dispersion of the risk of sales portfolios of the Group's customers, any reduction in demand concentration amongst a reduced number of markets and/or for BEKP and UWF in the markets of the European Union and customers. the United States could have a significant impact on the Group's sales. The demand for BEKP produced by Group also Environmental legislation depends on the evolution of the capacity for paper production in the world, since the major Group customers are BEKP In recent years, environmental legislation in the EU has paper producers. increased its constraints regarding the control of effluents. The companies of the Group conform to the prevailing legislation. The demand for printing and writing has been historically related with macroeconomic factors and the increasing use of Although no significant changes in legislation are expected in copy and print material. A breakdown of the economy, the near future, if that was to happen there is always the worldwide, can cause a slowdown or decline in demand for possibility that the Group may need to incur in increased printing paper and writing in this way affect the performance of expenditure, in order to comply with any new environmental the Group. requirements that may come into force.
Consumer preferences may have an impact on global demand Currently, any known changes in law are related to the and the role of certain particular types, such as the demand for predictable end of the CO2 emission rights’ free attribution recycled products or products with certified virgin fiber. regime, after the conclusion of the current stage of the National Plan for the Allocation of CO2 Emission Licences, Regarding this matter, and in the case of the UWF, the Group PNALE II. believes that the marketing strategy and branding that has been following, combined with the significant investments This change will increase the costs for the transformation made to improve productivity and produce high quality industry in general and in particular for the paper and pulp products, allow you to put your products in market segments industry, without any compensation for the CO2 that, annually, less sensitive to variations in demand, allowing a lower is absorbed by the forests of this industry. exposure to this risk. In order to reduce the impact of this change, the Group has Competition been following a strategy of carrying out a series of environmental related investments that, among other Increasing competition in paper and pulp markets may have a advantages, have resulted in a continued reduction of the CO2 significant impact in price and as a consequence in Group’s emissions, whilst the production volume has continuously profitability. increased within the last years.
As paper and pulp markets are highly competitive, new On the other hand, under the terms set in Decree-Law capacities may have a relevant impact in prices worldwide. 147/2008, dated 29 June that transposed directive 2004/35/CE to the national law, the Group ensured the environmental Producers from southern hemisphere (namely from Brazil, insurances demanded by the referred law, guaranteeing Chile, Uruguay and Indonesia), with significantly lower regulatory compliance and reducing exposure to production costs, have been gaining weight in the market, environmental risks. undermining the competitive position of European pulp producers. 2.1.3. Risks associated with the production of energy These factors have forced the Group to make significant investments in order to keep production costs competitive and Energy is considered to be an activity of growing importance in produce high quality products as it is likely that competitive the Group but, nonetheless, it is an activity that allows the use pressure will remain strong in the future. of the biomass generated in the BEKP production, but also ensuring the supply - under the co-generation regime - of The Portucel Group sells most of its paper production in thermal and electric power at the BEKP and UWF paper Europe, holding significant market shares in Southern industrial complexes. European countries and relevant market shares in the other major European markets, as well as an important presence in Considering the increasing integration of the Group’s mills the USA. dedicated to the production of BEKP and UWF paper and as a means of increasing the use of the biomass gathered in the The increase in the Group’s paper production capacity in 2010 woodlands, the Group built new natural-gas and biomass of almost 500 thousand tons per year, induced by the new power-generating units. These units serve to complement paper mill in Setúbal industrial complex, as well as potential those already in use, thus creating a number of redundant investments the Group might start in this area, may influence units which allow the Group to mitigate the risk of an interruption in the power supply to its industrial sites.
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i) Ports and railroads; In this sector, the main risk is linked to the supply of raw ii) Roads particularly those providing access to the material, namely, biomass. The group has played a pioneering Group’s producing units; role and has been developing a market for the sale of biomass iii) Rules regarding territory management and forest for supplying the power plants it owns. The fostering of this fires; market in a phase prior to the start-up of the new power- iv) Low productivity of the country’s forests; generating units enabled it to secure a sustained raw-material v) The majority of the Portuguese forest is not certified. supply network which it may utilize in the future. As previously mentioned, the Group has been making the Government and public opinion aware of the need to guarantee that biomass is viewed in a sustainable manner, avoiding the use of eucalyptus wood for biomass, as an alternative of its use in the production of tradable goods.
In addition, and despite the legal provisions that allow the Group to predict the stability of tariffs in the near future, there is a risk that the change in the sale’s tariff of the energy produced from renewable resources will penalize those products. The constant search for the optimization of production costs and efficiency of the generating units is the way the Group seeks to mitigate this risk.
Human Resources
The Group’s ability to successfully implement outlined strategies depends on its capacity to recruit and retain key talents for each role. Although the Group’s human resources policy seek to achieve these goals, there might be some limitations to achieve them in the future.
Other risks associated with the Group’s activity
The Group's manufacturing facilities are subject to risks inherent to any business industry, such as accidents, breakdowns or natural disasters that may cause losses in the Group's assets or temporary interruptions in the production process.
Likewise, these risks may also affect the Group’s main customers and suppliers, which would have a significant impact on the levels of the Group’s profitability, should it not be possible to find new customers to ensure sales levels and new suppliers enabling the Group to maintain its current cost structure.
The Group exports over 94% of its production. As a consequence, transportation and logistic costs are materially relevant. A continuous rise in transport costs may have a significant impact in Group’s earnings.
The Group’s activity is exposed to risks related to forest fires, including: i) destruction of actual and future wood inventory, belonging to the Group as well as to third parties; ii) increasing forestry costs and subsequent land preparation for plantation.
2.1.4. Context risks
The lack of efficiency in the Portuguese economy may have a negative effect on the Group’s ability to compete. This is more so, but not exclusively, in the following areas:
2.2 Group’s risks and the way it develops its activities
2.2.1. Risks associated with debt and liquidity levels
Given the nature of medium / long term investments, the Group has sought a debt structure that follows the maturity of the associated assets, thus seeking to hire long-term debt, and refinancing of short-term debt.
As such, as mentioned before, at the end of 2011, the Group had a gross debt of long-term Euro 566.8 million and a debt with a maturity of less than 1 year of 164.1 million Euros. The short-term liabilities are largely covered by cash surpluses accumulated by the company and the credit lines contracted and not used, so that the Group faces a very comfortable liquidity position.
Considering the structure of the debt contracted with a maturity appropriate to the assets it finances, the Group believes it will have an assured ability to generate future cash flows that will fulfill its responsibilities to ensure a level of investment in accordance with the provisions in their plans for medium / long term and maintain an adequate remuneration to its shareholders.
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The liquidity of financial liabilities contracted and paid will result in the following undiscounted cash flows, including interest at the rates currently in force, based on the remaining period to contractual maturity date of the statement of financial position:
Amounts in Euro Up to 1 month 1-3 months 3-12 months 1-5 uears More than 5 years Total As of 31 December 2011 Liabilities Interest-bearing liabilities Bond loans 887,289 2,036,267 164,037,694 419,228,581 - 586,189,831 Commercial paper ------Bank loans 3,156,960 - 14,841,167 90,937,553 96,541,503 205,477,183 Accounts payable and other liabilities 143,784,539 76,917,725 4,995,415 - - 225,697,679 Derivative financial instruments 2,467,939 - 642,298 - - 3,110,237 Other liabilities 375,410 1,133,380 3,075,628 18,109,325 - 22,693,742
Total liabilities 150,672,137 80,087,371 187,592,203 528,275,458 96,541,503 1,043,168,672
As of 31 December 2010 Liabilities Interest-bearing liabilities Bond loans 753,306 1,735,222 11,838,768 581,149,839 - 595,477,135 Commercial paper 50,105,340 - - - - 50,105,340 Bank loans 38,312,227 - 6,481,294 84,713,517 116,876,174 246,383,212 Accounts payable and other liabilities 138,069,453 38,148,372 24,563,082 - - 200,780,907 Derivative financial instruments 189,617 - - - - 189,617 Other liabilities 176,292 528,875 1,410,333 24,471,153 - 26,586,653
Total liabilities 227,606,234 40,412,469 44,293,478 690,334,509 116,876,174 1,119,522,864
Considering the debt structure that it has contracted, with a maturity profile which is compatible with the financed assets, the Group believes that it has secured the capacity to generate future cash flows that will allow it to comply with its obligations, to guarantee a level of capital expenditure in accordance with its medium/long term plans and to maintain a return for shareholders in line with past performance.
This presumption is based on the Group’s medium/long term plans, which consider the following main assumptions: i. A price level for eucalyptus wood between 95% and 105% of that recorded in the year; ii. A market selling price of BEKP between 70% and 115% of that recorded in the year; iii. A market selling price of UWF paper between 95% and 110% of that recorded in the year; iv. A net-debt cost between 90% and 110% of that recorded in the year; v. A production level for eucalyptus at the woodlands owned or operated by the group, of BEKP, of UWF paper and power within the existing installed capacities.
Certain borrowings contracted by the Group are subject to financial covenants which, if not met, could entail their early repayment.
The following covenants are currently in force:
Loan Racio BEI Ambiente Tranche A Interest Coverage = EBITDA 12M / Annualized net interest Indebtedness = Interest bearing liabilities / EBITDA 12 M
Portucel Bonds 2010-2015 Net Debt / EBITDA = Net Debt / EBITDA 12 M
Portucel Bonds 2010-2015 - 2nd Emission Net Debt / EBITDA = Net Debt / EBITDA 12 M
Based on the financial statements detailed in this report, these ratios were as follows as at 31 December 2011 and 2010:
Rácios 31-12-2011 31-12-2010 Interest Coverage 20.02 20.55 Indebtedness 1.53 2.12
Net Debt / EBITDA 1.10 1.63
Considering the contracted limits, the group was comfortably complying with the limits imposed under the financing contracts. As of 31 December 2011 the Group presents a rate of over 200% on the fulfilment of its covenants.
The group’s objectives regarding capital management (which is a wider concept than the capital shown in the statement of financial position) are: i. To safeguard the Group’s ability to continue in business and thus provide returns for shareholders and benefits for its remaining stakeholders; ii. To maintain a solid capital structure to support the growth of its business; and iii. To maintain an optimal capital structure that enables it to reduce the cost of capital.
In order to maintain or adjust its capital structure, the Portucel Group can alter the amount of dividends payable to its shareholders, return capital to its shareholders, issue new shares or sell assets to lower its borrowings.
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In line with the sector, the group monitors its capital based on its gearing ratio. This ratio represents net interest-bearing debt as a percentage of the total capital employed. Net interest-bearing debt is calculated by adding the total amount of loans (including the current and non current portions as disclosed in the statement of financial position) and deducting all cash and cash equivalents. Total capital employed is calculated by adding shareholders’ equity (as shown in the statement of financial position) and net interest-bearing debt.
The gearing ratios as of 31 December 2011 and 2010 were as follows:
Amounts in Euro 31-12-2011 31-12-2010 Total Loans (Note 29) 730,898,323 820,946,907 Cash and cahs equivalents (Note 29) (267,431,715) (133,958,910) Treasury shares at their market value (Nota 24) (42,154,975) (34,263,719) Net debt 421,311,633 652,724,278
Equity, excluding treasury shares 1,520,089,823 1,330,290,673 Equity 1,941,401,456 1,983,014,951
Gearing 21.70% 32.92%
2.2.2. Interest rate risk
The cost of the Group’s financial debt is indexed to short-term reference interest rates, which are reviewed more than once a year (generally every six months for medium and long-term debt) added of negotiated risk premiums. Hence, changes in interest rates can have an impact on the Company’s earnings.
The Group resorted to derivative financial instruments to cover its interest rate risk, namely interest-rate swaps, with the purpose of fixing the interest rate on the Group’s borrowings within certain limits. The swaps contracted in 2005 matured during 2010.Therefore, as at 31 December 2011 there was no interest rate hedging in place.
On 31 December 2011 and 2010, the detail of the financial assets and liabilities with interest rate exposure, taking in consideration the maturity or the next settlement date was as follows:
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Amounts in Euro Up to 1 month 1-3 months 3-12 months 1-5 years + 5 years Total As 31 December 2011 Asstes Non-current Available for sale financial assets ------Other non-current assets ------Currents Cash and cash equivalents 267,383,485 - - - - 267,383,485
Total Financial Assets 267,383,485 - - - - 267,383,485
Liabilities Non-currents Bearing Liabilities - 100,000,000 469,047,619 - - 569,047,619 Other non-current liabilities ------Currents Other bearing liabilities 3,125,000 - 160,960,292 - - 164,085,292
Total Financial Liabilities 3,125,000 100,000,000 630,007,911 - - 733,132,911
Accumulated differencial 264,258,485 164,258,485 (465,749,426) (465,749,426) (465,749,426)
Amounts in Euro Up to 1 month 1-3 months 3-12 months 1-5 years + 5 years Total As of 31 December 2010 Asstes Non-current Available for sale financial assets ------Other non-current assets ------Currents Cash and cash equivalents 133,913,348 - - - - 133,913,348
Total Financial Assets 133,913,348 - - - - 133,913,348
Liabilities Non-currents Bearing Liabilities 200,000,000 118,125,000 415,000,000 - - 733,125,000 Other non-current liabilities ------Currents Other bearing liabilities 88,125,000 - 3,125,000 - - 91,250,000
Total Financial Liabilities 288,125,000 118,125,000 418,125,000 - - 824,375,000
Accumulated differencial (154,211,652) (272,336,652) (690,461,652) (690,461,652) (690,461,652)
An increase of 0.5% on the interest rates in force as at 31 December 2011 would have had an impact in the income statement of approximately Euro 3,725,927.
2.2.3. Currency risk
Variations in the euro’s exchange rate against other currencies can affect the Group’s revenue in a number of ways.
On one hand, a significant portion of the Group’s sales is priced in currencies other than the Euro, namely in US dollar, GBP and CHF and other currencies with less relevance. The change of the Euro vis a vis these currencies can also have an impact on the Company’s future sales.
Furthermore, purchases of certain raw materials are also made in USD, namely some of the wood pulp and softwood import. Therefore, chages in EUR vis a vis USD may have an impact in acquisition values.
Aditionally, once a sale or purchase is made in a currency other than the Euro, the Group takes on an exchange risk up to the time it receives the proceeds of that sale or purchase, if no hedging instruments are in place. Therefore, Portucel’s assets always show receivables exposed to currency risk.
The Group holds an affiliated company in the USA, Portucel Soporcel North America, whose share capital amounts to around USD 25 millions and is exposed to foreign exchange risk. Besides this operation, the Group does not hold material investments in foreign operations whose net assets are exposed to foreign exchange risk.
Occasionally, when considered appropriate, the Group manages foreign exchange risks through the use of derivative financial instruments, in accordance with a policy that is subject to periodic review, the prime purpose of which is to limit the exchange risk associated with future sales and accounts receivable priced in currencies other than the euro.
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The table below shows the Group exposure to foreign exchange rate risk as of 31 December 2011, based on the financial assets and liabilities that amounted to a net asset of Euro 74,655,129 converted at the exchange rates as of that date (31 December 2010 Euro 53,961,254) as follows:
United States British Pound Polish Zloty Swedish Krone Czech Krone Swiss Franc Danish Krone Hungarian Australian Nor w is h Mozambique MAD Amounts in Foreign Currency Dolar Flor im Dolar Kr one Metical As of 31 December 2011 Assets Cash and cahs equivalents 1,465,638 371 10,328 - - 89,150 - - - - 7,991,465 - Accounts receivable 73,067,260 18,551,452 9,415,896 232,152 - 3,755,182 543,599 - 73,670 935,893 - 935,893 Available for sale financial assets ------Other assets ------Total Financial Assets 74,532,898 18,551,822 9,426,224 232,152 - 3,844,332 543,599 - 73,670 935,893 7,991,465 935,893
Liabilities Bearing liabilities ------Payables (2,882,113) (1,679,107) (338,227) (499,742) (152) (7,833,648) (686,990) (2,279) (491,414) - (530,416) Total Financial Liabilities (2,882,113) (1,679,107) (338,227) (499,742) (152) (7,833,648) (686,990) - (2,279) (491,414) - (530,416)
Net Financial Position 71,650,785 16,872,715 9,087,997 (267,589) (152) (3,989,317) (143,391) - 71,391 444,479 7,991,465 405,477
As of 31 December 2010 Total Financial Assets 53,645,517 16,065,219 4,285,847 1,326,797 274 2,595,789 1,526,510 5,160,001 96,887 - - - Total Financial Liabilities (7,847,078) (1,355,221) (310,266) (136,628) (87,660) (1,025,407) (622,428) (67,508) (3,042) - - - Net Financial Position 45,798,439 14,709,998 3,975,581 1,190,169 (87,386) 1,570,382 904,081 5,092,493 93,845 - - -
As of 31 December 2011 a negative variation of 5% of all currency rates to euro would have a negative impact on results of Euro 3,555,006 (as of 31 December 2010 Euro 3,508,254) excluding the effect of the derivative financial instruments to hedge foreign exchange risks (Note 31), which would almost fully cancel this variation.
2.2.4. Credit risk
The Group is exposed to credit risk in the credit it grants to its customers and, accordingly, it has adopted a policy of managing such risk within preset limits, through the negotiation of a credit insurance policy with a specialized independent company.
Sales that are not covered by credit insurance are covered by bank guarantees and documentary credits, and any exposure is not covered, is within limits approved by the Executive Committee.
However, the worsening global economic conditions, or hardships affecting the economy at a local scale can lead to a deterioration in the ability of the Group's customers pay off their obligations, leading to the entities providing credit insurance to significantly decrease the amount of the credit insurance lines that are available to those customers. This is the scenario the Group faces today that results in serious limitations on the amounts the Group can sell to certain customers, without incurring in unaffordable direct credit risk levels.
As a result of the strict credit control policy followed by the Group, bad debts during 2011 were virtually non existent.
As of 31 December 2011 and 2010, accounts receivable from costumers showed the following ageing structure, considering the due dates for the open balances:
Amounts in Euro 31-12-2011 31-12-2010
Not overdue 179,172,416 131,370,138 1 to 90 days 24,264,675 27,195,090 91 to 180 days 546,726 2,548,492 181 to 360 days 58,628 2,106,739 361 to 540 days 928 346,987 541 to 720 days - 126,076 more than 721 days 181,993 123,200
204,225,366 163,816,723 Litigation - doubtful debts 2,166,009 2,285,539 Impairments (2,110,064) (1,999,809) Net receivables balance (Note 21) 204,281,311 164,102,453 Limit of the negotiated credit insurance 195,893,248 133,215,188
The amounts shown above correspond to the open items according to the contracted due dates. Despite some delays in the liquidation of those amounts, that does not result, in accordance with the available information, in the identification of impairments further than the ones considered through the respective losses. These are identified using the information periodically collected about the financial behaviour of the Group customers, which allow, in conjunction with the experience obtained in the client portfolio analysis and with the history of credit defaults, in the share not attributable to the insurance company, to define the amount of losses to recognise in the period.
The guarantees in place for a significant part of the open and old balances, justify the fact that no impairment has been recorded for those balances. The rules defined by the credit risk insurance policy applied by the Group, ensure a significant coverage of all open balances.
Consolidated Annual Report 2011 103 Translation of a report originally issued in Portuguese – Note 42
Accounts receivable outstanding, by business area, were analyzed as follows as at 31 December 2011 and 2010:
31-Dec-2011 Amounts in Euro Pulp and paper Energy Foresty Not allocated Total Not overdue 159,230,457 19,339,240 503,358 99,361 179,172,416 1 to 90 days 15,623,181 8,059,271 475,440 106,783 24,264,675 91 to 180 days - - 448,423 98,303 546,726 181 to 360 days - - 55,681 2,947 58,628 361 to 540 days 928 - - - 928 541 to 720 days - - - - - more than 721 days - - 181,993 - 181,993 174,854,566 27,398,511 1,664,895 307,394 204,225,366
31-Dec-2010 Amounts in Euro Pulp and paper Energy Foresty Not allocated Total Not overdue 117,932,023 12,935,005 466,769 36,341 131,370,138 1 to 90 days 21,226,052 4,439,835 1,516,166 13,038 27,195,091 91 to 180 days 568,248 - 1,980,244 - 2,548,492 181 to 360 days - - 2,092,079 14,660 2,106,739 361 to 540 days - - 16,251 330,736 346,987 541 to 720 days 106,125 - 19,951 126,076 more than 721 days 109,225 - 13,975 - 123,200 139,941,673 17,374,840 6,105,435 394,775 163,816,723
As at 31 December 2011, the available credit insurance lines available amounted to Euro 395,753,303 (Euro 344,158,861 as at 31 December 2010).
The table below represents the quality of the Group’s credit risk, as of 31 December 2011 and 2010, for financial assets (cash and cash equivalents), whose counterparts are financial institutions (Credit rating by Standard & Poor’s):
Financial Institutions Amounts in Euro 31-12-2011 31-12-2010 Rating AA - 610 549 A+ 587 625 - A 76 009 014 3 109 778 A- 95 616 1 954 603 BBB + 60 029 703 90 523 660 BBB - 57 618 383 36 000 000 BB + 29 902 183 - BB 42 446 116 - Other 694 595 1 845 608 267 383 235 134 044 198
The caption “Other” relates to financial institutions with whom there are transactions of reduced relevance and relatively to which it was not possible to obtain the ratings with reference to the presented dates.
The following table shows an analysis of the quality of credit of the accounts receivable from customers relatively to which, considering the information available to the Group, no default or impairment loss was considered.
Amounts in Euro 31-12-2011 31-12-2010 Credit Credit Gross amount Insurance Gross amount Insurance Accounts receivable overdue but not impaired Overdue - less than 3 months 24 264 675 13 890 138 27 195 090 8 255 325 Overdue - more than 3 months 788 275 173 518 5 251 494 3 379 25 052 950 14 063 656 32 446 584 8 258 704
Accounts receivable overdue and impaired Overdue - less than 3 months - - - - Overdue - more than 3 months 2 110 064 - 1 999 809 - 2 110 064 - 1 999 809 -
Consolidated Annual Report 2011 104 Translation of a report originally issued in Portuguese – Note 42
The maximum exposure to the credit risk as at 31 December 2011 and 2010 is detailed in the following schedule. In accordance with the policies described above, the Group contracted credit insurance policies for most of the accounts receivable from its clients. As such, the Group’s exposure to credit risk is considered to have been mitigated to within acceptable levels.
Amounts in Euro Maximum Exposure 31-12-2011 31-12-2010 Current Receivables 296 941 217 245 067 566 Cash and cash equivalents 267 383 485 133 913 348 Derivative financial instruments - 240 379 Exposure to credit risk on off balance sheet exposures Guarantees (Note 36.1) 37 555 215 32 914 147 Related responsabilities (Note 22) (34 040 320) (18 948 939)
Consolidated Annual Report 2011 105 Translation of a report originally issued in Portuguese – Note 42
3. Important accounting estimates 3.5 Credit risk
and judgments As mentioned before, the Group manages credit risks in its receivables through risk analysis when granting credit to new The preparation of consolidated financial statements requires customers, and through regular review of the performance of that the Group’s management makes judgments and estimates its costumer portfolio. that affect the amount of revenue, costs, assets, liabilities and disclosures at the date of the statement of financial position. Due to the nature of the customers, the Group’s receivables portfolio does not lend itself to general credit ratings based on These estimates are influenced by the Group’s management’s classification and analysis in terms of a homogeneous judgments, based on: (i) the best information and knowledge population. Hence the Group collects data on its customers’ of present events and in certain cases on the reports of financial performance through regular contact, as well as independent experts; and (ii) the actions which the Group through contacts with other entities with whom the Group does considers it may have to take in the future. However, on the business (e.g., sales agents). date on which the operations are realised, the outcome could be quite different from those estimates. In addition, most of the Group’s receivables are covered by an insurance policy it contracted that limits the exposure in these The estimates and assumptions which present a significant receivables – generally - to the retention portion to be paid in risk of generating a material adjustment to the book value of case of any incident, which varies based on the customer’s assets and liabilities in the following financial period are geographical location. The insurer’s acceptance of the Group’s presented below: credit portfolio and the premiums that the Group pays for that coverage are a good proof of the average quality of the 3.1 Impairment of Goodwill Group’s portfolio.
The Group annually tests whether has been any impairment 3.6 Recognition of provisions and impairments loss in the goodwill carried in its statement of financial position, in accordance with the accounting policy described in Note The Group is part in several lawsuits underway, for which, 1.8. The recoverable amounts of the cash generating units are based in the opinion of its lawyers, a judgment is made to ascertained based on the calculation of their value-in-use. determine the booking of a provision for these contingencies. These calculations require the use of estimates. Impairment losses in accounts receivable are calculated On 31 December 2011, a potential worsening of 0.5% in the essentially based on accounts receivable’s ageing, the discount rate used in the impairment tests of that asset – customers’ risk profile and financial situation. If it had been Goodwill allocated to the Figueira da Foz Paper cash calculated through the criteria set by the Portuguese tax generating unit - would mean an overall decrease of Euro legislation, the impairment adjustments would have been 162,522,601 in its assessed value, which would still be higher higher by Euro 762,443. than its book value by 16%.
3.2 Income tax
The Group recognizes additional tax assessments resulting from inspections undertaken by tax authorities.
When the final outcome of the above reviews is different from the amounts initially recorded, the differences will have an impact on the corporate income tax and the deferred taxes in the periods when such differences are identified.
On 31 December 2011, a potential increase of 0.5% in the effective income tax rate would mean an overall increase of Euro1, 252,019 in the income tax expense.
3.3 Actuarial assumptions
Liabilities relating to defined-benefit plans are calculated based on certain actuarial assumptions. Changes to those assumptions can have a material impact on the aforesaid liabilities.
On 31 December 2011, a potential decrease of 0.25% in the discount rate used in the actuarial assumptions would mean an overall increase of liabilities amounting Euro 6,358,425 in their assessed value.
3.4 Fair value of biological assets
In determining the fair value of its biological assets, the Group used the discounted cash flows method considering assumptions related to the nature of the assets being valued (Note 1.9). Changes in these assumptions may have an impact in the value of those assets.
As of 31 December 2011, an increase of 0.5% in the discount rate (6.6%) used to value those assets, would decrease their value by Euro 4,045,028.
Consolidated Annual Report 2011 106 Translation of a report originally issued in Portuguese – Note 42
4. Segment Information
Segment information is presented for identified business segments, namely Forestry, Pulp, Paper and Energy. Revenues, assets and liabilities of each segment correspond to those directly allocated to them, as well as to those that can be reasonably attributed to those segments.
Financial data by operational segment for the year ended 31 December 2011 and 2010 is shown as follows:
2011 ELIMINATIONS/ PULP INTEGRATED FORESTRY STAND ALONE PULP AND PAPER ENERGY UNALLOCATED TOTAL
REV ENUE Sales and services - external 2,739,353 135,662,379 1,167,926,489 165,710,114 1,258,216 1,473,296,550 Other revenue - 2,173,198 11,547,772 866,773 - 14,587,743 Sales and services - intersegment 195,174,709 48,490,836 (243,665,545) - Total revenue 197,914,062 137,835,577 1,179,474,261 215,067,723 (242,407,329) 1,487,884,293
Profit/(loss) Segmental Profit 8,242,997 22,053,865 217,620,727 17,872,553 366,320 266,156,463 Opertaing Profit -- -- -266,156,463 Financial costs- net - - - - (15,752,704) (15,752,704) Income tax - - - - (54,057,904) (54,057,904) Net profit before non-controling interest -- -- -196,345,855 Non-controling interest - - - - (14,467) (14,467) Ne t pr ofit -- -- -196,331,388
Other Information
Segment assetrs 232,200,618 496,988,481 1,406,834,851 361,199,892 322,123,447 2,819,347,290 Financial investments - - 126,032 1,778,657 - 1,904,689 Total assets 232,200,618 496,988,481 1,406,960,883 362,978,549 322,123,447 2,821,251,978
Segment liabilities 23,208,803 302,492,529 816,042,647 166,832,121 34,520,369 1,343,096,469 Total liabilities 23,208,803 302,492,529 816,042,647 166,832,121 34,520,369 1,343,096,469
Capital expenditure 2,679,146 24,869,157 22,066,043 3,802,141 380,065 53,796,551 Depreciation 180,329 6,215,442 101,487,672 14,577,698 2,066,263 124,527,404 Provisions (5,610,786) (5,610,786)
2010 ELIMINATIONS/ PULP INTEGRATED FORESTRY STAND ALONE PULP AND PAPER ENERGY UNALLOCATED TOTAL
REV ENUE Sales and services - external 7,826,865 162,099,577 1,068,680,601 140,507,814 6,340,831 1,385,455,688 Other revenues ------Sales and services - intersegment 206,746,746 - - 57,134,337 (263,881,083) - Total revenue 214,573,611 162,099,577 1,068,680,601 197,642,151 (257,540,252) 1,385,455,688
Profit/(loss) Segmental Profit 15,389,818 49,044,947 208,202,382 10,191,223 (5,011,640) 277,816,730 Opertaing Profit -- -- -277,816,730 Financial costs- net - - - - (20,079,417) (20,079,417) Income tax - - - - (47,157,088) (47,157,088) Net profit before non-controling interest -- -- -210,580,225 Non-controling interest - - - - 7,855 7,855 Ne t pr ofit -- -- -210,588,080
Other Information
Segment assetrs 186,991,545 147,428,515 1,894,633,188 308,606,120 128,713,948 2,666,373,316 Financial investments - - 126,074 516,173 - 642,247 Total assets 186,991,545 147,428,515 1,894,759,262 309,122,293 128,713,948 2,667,015,563
Segment liabilities 7,173,756 16,117,594 1,028,131,492 237,547,365 74,542,389 1,363,512,596 Total liabilities 7,173,756 16,117,594 1,028,131,492 237,547,365 74,542,389 1,363,512,596
Capital expenditure 572,373 49,661,570 43,350,695 2,313,443 - 95,898,081 Depreciation 533,878 18,192,884 88,367,759 14,090,263 - 121,184,784 Provisions - - - - 1,165,032 1,165,032
Consolidated Annual Report 2011 107 Translation of a report originally issued in Portuguese – Note 42
Sales and services rendered by region Amounts in Euro 2011 2010 Cost of Inventories Sold and Consumed (580,268,510) (517,223,456) Variation in production (38,752,817) (5,635,463) Amounts in Euro 2011 2010 Cost of Services and Materials Consumed (358,296,358) (336,907,043) Payroll costs Remunerations Eu r o p e Statutory bodies - fixed (3,672,867) (3,570,374) Paper 727,852,411 783,569,599 Statutory bodies - variable (4,418,451) (4,252,557) Other remunerations (91,223,633) (89,147,976) Pulp 128,594,139 149,693,250 (99,314,951) (96,970,907) Energy 166,576,887 140,507,814 Social charges and other payroll cost Pension and retirement bonus - defined benefit plans Forestry 2,739,353 7,826,865 (Note 27) (3,254,313) (5,406,918) Unallocated 1,258,216 6,340,831 Pension costs - defined contribution plans (Note 27) (1,058,623) 2,912,416 Contributions to Social Security (17,159,181) (14,393,220) 1,027,021,006 1,087,938,359 Other payroll costs (12,926,025) (13,161,610) America (34,398,141) (30,049,332) Paper 126,212,256 128,249,077 (133,713,092) (127,020,239) Other costs and losses Pulp 1,889,885 1,692,772 Membership fees (798,057) (679,325) Losses on inventories (351,708) (234,861) 128,102,141 129,941,849 Impairment losses on receivables (Note 23) (14,872) (689,069) Other markets Impairment losses on inventories (Note 23) (1,111,054) (6,012) Paper 325,409,593 156,861,925 Indirect taxes (611,746) (1,275,357) Shipment costs (2,189,848) (1,392,084) Pulp 7,351,553 10,713,555 Water resources charges (2,016,732) (1,098,185) 332,761,146 167,575,480 Cost w ith CO2 emissions (4,040,298) (6,367,702) Other operating costs (2,395,491) (1,832,119) 1,487,884,293 1,385,455,688 (13,529,807) (13,574,714) Provisions (Note 28) 5,610,786 (1,165,032) Total (1,118,949,799) (1,001,525,947) Sales of the forestry and energy segments and other unallocated were made in the Portuguese market. Payroll expenses are detailed as follows for the year ended 31 December 2011 and 2010: In general, all major assets of the business segments are located in Portugal. Amounts in Euro 2011 2010 5. Other operating income Salaries 99,314,950 96,970,907 Social Charges 17,159,181 14,393,220 Other operating income is detailed as follows for the year Healthcare 813,383 783,818 ended 31 December 2011 and 2010: Formation 1,295,482 1,607,506
Amounts in Euro 2011 2010 Social Action 4,312,936 3,326,169
Supplementary income 595,012 827,624 Insurance 2,980,198 2,927,980 Grants - CO2 Emission allow ances (Note 6) 12,630,668 12,768,616 Other 7,836,962 7,010,638 Reversal of impairment losses in current assets (Note 23) 662,690 336,393 Gains on disposals of non-current assets 75,040 3,194,781 133,713,092 127,020,239 Gains on inventories 730,440 - Gains on disposals of current assets 34,237 1,739,151 Government grants 2,003,333 1,871,029 For the year ended 31 December 2011, the costs incurred with Ow n w ork capitalised 672,092 79,247 Other operating income 4,079,170 2,042,286 investigation and research activities amounted to Euro 21,482,682 22,859,127 5,582,054 (31 December 2010: Euro 4,659,095). In 2011, these amounts include Euro 1,124,096 related to Gains from government grants mainly relate to research in the costs incurred in identifying species of eucalyptus with forestry and industrial activities, obtained by some industrial viability in the areas awarded by concession to the subsidiaries, namely Raiz, PortucelSoporcel Florestal and Group by the Mozambique State. Soporcel. 7. Remuneration of Statutory Bodies 6. Operating expenses For the year ended 31 December 2011 and 2010, this heading Operating expenses are detailed as follows for the years refers to the fixed remuneration of the members of the ended 31 December 2011 and 2010: corporate bodies and is detailed as follows:
Am ounts in Euro 2011 2010
Board of directors Portucel, S.A. 3.074.103 2.951.103 Corporate bodies from other group companies 162.710 293.056 Stautory Auditor (Note 34) 374.696 275.507 Audit Board 48.608 41.208 General Assembly 12.750 9.500 3.672.867 3.570.374
For the year ended 31 December 2011 the Group recognised past services costs related with pensions of five Board members, as detailed in Note 27.
8. Depreciation, amortisation and impairment losses
For the years ended 31 December 2011 and 2010, depreciation, amortisation and impairment losses, net of the effect of investment grants recognized in the period were as follows:
Consolidated Annual Report 2011 108 Translation of a report originally issued in Portuguese – Note 42
Amounts in Euro 2011 2010 Companies included within the consolidation scope of the
Depreciation of property, plant and equipment group of companies subject to this regime calculate and Buildings (9,903,702) (14,478,839) recognise income tax (IRC) as though they were taxed on an Equipments (108,893,319) (103,960,926) individual basis. If gains are determined on the use of this Other tangible assets (2,791,495) (2,279,290) regime, they are recorded as income of the parent company (121,588,516) (120,719,055) Depreciation of intangible assets (Portucel). Industrial property and other rights (2,938,888) (465,729) (2,938,888) (465,729) In accordance with the prevailing legislation, gains and losses (124,527,404) (121,184,784) from Group companies and associates arising from the
application of the equity method are deducted or added, Depreciation of intangible assets include Euro 2,917,654 respectively, from or to the net income for the period when related to an impairment loss on the CO2 emission calculating the taxable income for the period. allowances, valued at the lower between the market values at the date of attribution and the date fo the statement of financial Dividends are considered when determining the taxable position. income in the year in which they are received, if the assets are
held for less than one year or if investments represent less 9. Changes in government grants than 10% of the share capital.
The liabilities with government grants evolued as follows: Income tax is detailed as follows for the year ended 31 December 2011 and 2010: Amounts in Euro 2011 2010 Governm ent Grants Amounts in Euro 2011 2010
Opening Balance 60,694,725 40,637,301 Current tax (Note 22) 43,489,969 31,278,866 Utilization (6,591,342) (11,187,516) Provision / (reversal) for current tax 5,107,598 (5,002,129) (Regularization) / Increase - 31,244,940 Deferred tax (Note 26) 5,460,337 20,880,351 54,057,904 47,157,088 Closing balance (Note 30) 54,103,383 60,694,725 Current tax includes Euro 35,372,292 (2010: Euro 28,005,213) On 12 July 2006, the Group and API – Agência Portuguesa regarding the liability created in the above mentioned para o Investimento (currently designated AICEP – Agência agregated income tax regime. para o Investimento e Comércio Externo de Portugal) entered into four investment contracts. These contracts comprised The provision for current tax is detailed as follows: financial and tax incentives amounting to Euro 74,913,245 and Euro 102,038,801, respectively. Amounts in Euro 2011 2010
(Excess) / understatement in the estimate for income tax (3,240,529) (3,591,099) The use of these incentives since its activation was as follows: Change in the estimate for additional payments 12,841,826 (2,171,033) Coporate Income Tax 2010 (settlement) (3,976,970) - Financial Fis cal Coporate Income Tax 2007 (settlement) - 841,466 Amounts in Euro Incentives Incentives Total Coporate Income Tax 2003 (settlement) - 24,315 Coporate Income Tax 2002 (reimbursement) - Soporcel - (108,682) 2006 - 7,905,645 7,905,645 Withholding taxes - ENCE (516,729) - 2007 18,014,811 4,737,655 22,752,466 Other - 2,904 2008 9,045,326 5,696,016 14,741,342 5,107,598 (5,002,129) 2009 3,862,707 1,720,719 5,583,426 2010 10,945,586 15,937,709 26,883,296 The excess in the estimate for income tax mainly results from 2011 6,271,415 13,184,952 19,456,367 the calculation of tax benefits with SIFIDE and RFAI, which 48,139,845 49,182,696 97,322,541 have only been made upon delivery of the income tax statement. 10. Net financial costs From 2001 to 2004, ENCE – Empresa Nacional de Celulose, Financial costs are detailed as follows for the years ended 31 S.A., a company in which Portucel held a 8% share until 2004, December 2011 and 2010: paid dividends totaling Euro 3,444,862, which were subject to withholding tax of Euro 516,729. Amounts in Euro 2011 2010 Interest paid on borrow ings (22,763,525) (21,535,218) Portucel challenged the amount withheld on the basis that it Interest earned on investments 7,505,282 2,062,276 violated the right of free establishment foreseen in the Treaty Exchange rate differences 5,812,520 186,947 of Rome (dividends paid to an entity resident in Spain are not Gains / (losses) on financial instruments - subject to withholding tax). The claim was rejected in February trading (Note 31) (2,409,172) 1,320,395 Gains / (losses) on financial instruments - 15, 2008, and the Company appealed to court on April 29, hedging (Note 31) (3,435,931) (2,186,915) 2008. Through a court ruling of 26 October 2010, and following Compensatory interest 880,343 167,638 the decision of 3 June 2010 – case C-487/08 (European Other financial income / (expenses) (1,935,972) (94,540) Commission vs. Kingdom of Spain) – the EU court of Justice concluded in favour of Portucel’s views. This amount was (16,346,454) (20,079,417) repaid to Portucel on 8 April 2011. Other financial expenses include Euro 1,047,188 (2010: Euro 716,244) related to guarantees provided to the European In the years ended 31 December 2011 and 2010, the Investment Bank (BEI). reconciliation of the effective income tax rate was as follows:
Amounts in Euro 2011 2010
11. Income Tax Profit before tax 250,403,760 257,737,313
Expected tax 25.00% 62,600,940 25.00% 64,434,328 Portucel is taxed under the special tax regime applicable to Municipal surcharge 1.50% 3,756,056 1.50% 3,866,060 groups of companies comprising all entities whose capital is State surcharge 2.50% 6,260,094 2.50% 6,443,433 Differences (a) (9.20%) (23,028,531) (6.98%) (17,995,440) held 90% or more and which meet the conditions foreseen in Impact of the change in the income tax rate 5.12% 12,830,272 4.40% 11,348,545 articles 69 and following of the Portuguese Corporate Income Provision for current tax 2.04% 5,107,598 (1.94%) (5,002,129) Tax benefits (5.38%) (13,468,525) (6.18%) (15,937,709) Tax Code (Código do Imposto sobre o Rendimentos de 21.59% 54,057,904 18.30% 47,157,088 Pessoas Colectivas), since 1 January 2003.
Consolidated Annual Report 2011 109 Translation of a report originally issued in Portuguese – Note 42
(a) This amount is made up essentially of : Appropriations made in 2011 and 2010 over the 2010 and 2011 2010 2009 net profits were as follows: Capital gains / (losses) for tax purposes (35,232,143) (21,237,952) Capital gains / (losses) for accounting purposes (17,269,099) (10,510,329) Taxable provisions 5,588,757 (20,874,325) Amounts in Euro 2010 2009 Tax benefits (1,595,361) (635,449) Effect of pension funds (333,250) (1,380,812) Distribution of dividends (excluding treasury shares) - 62,076,765 Other (30,567,632) (13,252,599) Legal reserves 10,540,737 4,675,621 (79,408,728) (67,891,466) Tax Effect (2011: 29%; 2010: 26,5%) (23,028,531) (17,991,238) Other reserves - - Net income from prior years 200,047,343 38,327,174 Tax losses from previous years - 16,806 210,588,080 105,079,560 Tax Effect (25%) - 4,202 (23,028,531) (17,995,440) The resolution for the appropriation of the 2010 net profit, In Portugal, the annual tax returns are subject to review and passed at Portucel’s General Meeting held on 19 May 2011, potential adjustment by tax authorities for a period of up to 4 was based on the net profit for the year as defined by the years. However, if tax losses are utilised, these may be subject accounting principles generally accepted in Portugal to review by the tax authorities for a period of up to 6 years. (Portuguese GAAP). The difference in net profit between the two standards, totalling Euro 226,653 (2009: Euro 33,623,766) In other countries where the Group operates, these periods was transferred to retained earnings. are different and, in most cases, higher. 15. Goodwill The Board of Directors believes that any reviews/ inspections by tax authorities will not have a material impact on the Goodwill amounting to Euro 428,132,254 was determined consolidated financial statements as of 31 December 2011. following the acquisition of 100% of the share capital of The income tax returns up to 2009 have already been Soporcel – Sociedade Portuguesa de Papel, S.A., for Euro reviewed. 1,154,842,000, representing the difference between the acquisition cost of the shares and the respective shareholders’ 12. Earnings per share equity as of the date of the first consolidation, retroactive to 1 January 2001, adjusted by the effect of attribution of the fair Earnings per share were determined as follows: value to Soporcel’s property, plant and equipment.
Amounts in Euro 2011 2010 The goodwill generated at the acquisition of Soporcel was deemed to be allocatable to the paper production cash Profit attributable to the Company's shareholders 196,331,389 210,588,080 generating unit. Total number of issued shares 767,500,000 767,500,000 Treasury shares - yearly average (Note 25) (18,636,203) (15,054,358) As at 31 December 2010, assets and liabilities related to pulp 748,863,797 752,445,642 production were transferred to another Group company, as a Basic earnings per share 0.262 0.280 result of a split. Diluted earnings per share 0.262 0.280
Since there are no convertible financial instruments over The book value of goodwill amounts to Euro 376,756,384, as it Group shares, its earnings are undiluted. was amortised up to 31 December 2003 (transition date). As of that date, the accumulated depreciation amounted to Euro Changes over the average number of treasury shares are as 51,375,870. From that date on, depreciation was ceased and follows: replaced by annual impairment tests. If this amortisation had 2011 2010 not been interrupted, as of 31 December 2011 the net book Quant. Accumulated Quant. Accumulated Treasury shares held on 1 January 15,054,358 15,054,358 value of the Goodwill would amount to Euro 239,754,062 (31 Acquisitions December 2010: Euro 256,879,352). January - 15,054,358 - 15,054,358 February 188,000 15,242,358 - 15,054,358 March 979,612 16,221,970 - 15,054,358 April 297,906 16,519,876 - 15,054,358 Every year, the Group calculates the recoverable amount of May 1,773,671 18,293,547 - 15,054,358 Soporcel’s assets (to which the goodwill recorded in the June 883,067 19,176,614 - 15,054,358 July 62,200 19,238,814 - 15,054,358 consolidated financial statements is associated), based on August 446,298 19,685,112 - 15,054,358 September 294,000 19,979,112 - 15,054,358 value-in-use calculations, in accordance with the Discounted October 635,481 20,614,593 - 15,054,358 Cash Flow method. The calculations are based on past November 893,562 21,508,155 - 15,054,358 December 591,777 22,099,932 - 15,054,358 performance and business expectations with the actual Treasury shares held on 31 December 7,045,574 22,099,932 - 15,054,358 production structure, using the budget for next year and Average number of ow n shares held 18,636,203 15,054,358 projected cash flows for the next 4 years, based on a constant sales volume. As a result of the calculations, no impairment 13. Non-controlling Interests losses have been identified.
The movements in non-controlling interests are detailed as The main assumptions for the above-mentioned calculation follows for the years ended 31 December 2011 and 2010: were as follows: 2011 2010 Amounts in Euro 2011 2010 Inflation rate 2% 2%
Opening balance 216,755 230,003 Discount rate (post-tax) 9.37% 7.77% Net profit of the year 14,467 (7,855) Production Grow th 0% 0% Other Changes (10,562) (5,393) Closing balance 220,660 216,755 The discount rate presented above is a post-tax tax rate equivalent to a discount rate pre-tax of 12.84%, and has been Non-controlling interests relate to Raiz – Instituto de calculated in accordance with the WACC (Weighted Average Investigação da Floresta e Papel (Forest and Paper Research Cost of Capital) methodology, based in the following Institute), in which the Group holds 94% of the capital and assumptions: voting rights. The remaining 6% are held by equity holders 2011 2010 external to the Group. Risk-free interest rate 5.50% 4.80% Equity risk premium (market and entity) 5.00% 4.50% 14. Appropriation of previous years’ Tax rate 29.00% 29.00% Debt risk premium 3.00% 2.40% profit
Consolidated Annual Report 2011 110 Translation of a report originally issued in Portuguese – Note 42
16. Other intangible assets
Over the year ended 31 December 2011 and 2010, changes in other intangible assets were as follows:
Industrial CO2 emission property and licenses Amounts in Euro other rights Total
Acquisition costs Amount as of January 2010 1,896,278 1,856,237 3,752,515 Acquisitions - 12,808,388 12,808,388 Disposals - (14,591,373) (14,591,373) Adjustments, transfers and w rite-off's - - - Amount as of 31 December 2010 1,896,278 73,252 1,969,530 Acquisitions - 12,630,673 12,630,673 Disposals - - - Adjustments, transfers and w rite-off's (1,311) (7,009,512) (7,010,823) Amount as of 31 December 2011 1,894,967 5,694,413 7,589,380
Accumulated depreciation and impairment losses Amount as of 1 January 2010 (1,875,044) - (1,875,044) Amortization and impairment losses - - - Disposals - -- Adjustments, transfers and w rite-off's - - - Amount as of 31 December 2010 (1,875,044) - (1,875,044) Amortization and impairment losses (21,234) (2,917,654) (2,938,888) Disposals - - - Adjustments, transfers and w rite-off's 1,311 - 1,311 Amount as of 31 December 2011 (1,894,967) (2,917,654) (4,812,621)
Net book value as of 1 January 2010 21,234 1,856,237 1,877,471 Net book value as of 31 December 2010 21,234 73,252 94,486 Net book value as of 31 December 2010 21,234 73,252 94,486 Net book value as of 31 December 2011 - 2,776,759 2,776,759
In January 2008, the second period for the attribution of CO2 emission rights (2008-2012) begum, under the National Plan for the Allocation of CO2 Emission Rights (PNALE). Under this regime, the following rights were allocated to the Portucel Group, through the joint publication nº 2836/2008, January 8, issued by the Ministry for Environment, Ministry for Planning and Regional Development as well as the Ministry of Economy and Innovation:
Cacia Figueira da Foz Setúbal Total Energy Pulp Energy Pulp / Paper Energy Pulp / Paper Energy Pulp / Paper General PORTUCEL, S. A. - 32,608 - - - 35,646 - 68,254 68,254 SOPORCEL, S. A. - - - 56,467 - - - 56,467 56,467 ENERPULP, S. A. 98,590 - 85,807 - 65,832 - 250,229 - 250,229 PortucelSoporcel Cogeração de Energia, S.A. - - - - 156,099 - 156,099 - 156,099 SPCG, S. A. - - - - 293,431 - 293,431 - 293,431 About the Future, S.A. - - - - - 68,147 - 68,147 68,147 98,590 32,608 85,807 56,467 515,362 103,793 699,759 192,868 892,627
Consolidated Annual Report 2011 111 Translation of a report originally issued in Portuguese – Note 42
17. Property, plant and equipment
Over the years ended 31 December 2011 and 2010, changes in Property, plant and equipment, as well as the respective depreciation and impairment losses, were as follows:
Building and Equipments and Assets under Land other Total other tangibles construction Amounts in Euro constructions
Acquisition costs Amount as of 1 January 2010 108,207,782 477,978,350 3,100,516,304 175,172,051 3,861,874,487 Acquisitions 400,553 22,579,326 58,675,235 14,242,967 95,898,081 Disposals - - (1,247,497) - (1,247,497) Adjustments, transfers and w rite-off's 301,133 (2,274,394) 164,116,300 (162,835,658) (692,619) Amount as of 31 December 2010 108,909,468 498,283,282 3,322,060,342 26,579,360 3,955,832,452 Acquisitions 5,096,772 526,367 28,208,987 19,964,425 53,796,551 Disposals - (1,338,671) (100,473,518) - (101,812,189) Adjustments, transfers and w rite-off's - 711,540 26,733,182 (26,956,086) 488,636 Amount as of 31 December 2011 114,006,240 498,182,518 3,276,528,993 19,587,699 3,908,305,450
Accumulated depreciation and impairment losses Amount as of 1 January 2010 - (278,365,867) (1,957,117,152) - (2,235,483,019) Amortizations and impairment losses - (23,032,004) (94,434,590) - (117,466,594) Disposals - - 1,247,497 - 1,247,497 Adjustments, transfers and w rite-off's - - (610) - (610) Amount as of 31 December 2010 - (301,397,871) (2,050,304,855) - (2,351,702,726) Amortizations and impairment losses - (9,810,839) (114,108,826) - (123,919,666) Disposals - 836,642 96,668,670 - 97,505,312 Adjustments, transfers and w rite-off's - - (479,145) - (479,145) Amount as of 31 December 2011 - (310,372,068) (2,068,224,157) - (2,378,596,225)
Net book value as of 1 January 2010 108,207,782 199,612,483 1,143,399,152 175,172,051 1,626,391,468 Net book value as of 31 December 2010 108,909,468 196,885,411 1,271,755,487 26,579,360 1,604,129,726 Net book value as of 31 December 2011 114,006,240 187,810,450 1,208,304,837 19,587,699 1,529,709,225
The changes shown above have been adjusted for the values of cost and accumulated depreciation and impairment losses, without any impact on the net book value shown in the statement of financial position.
The Group holds a stake of 18% on Soporgen – Sociedade Portuguesa de Geração de Electricidade e Calor, S.A., whose main activity is the production of steam and electric power, exclusively sold to Soporcel.
In 2009, with the start of operations in the new paper mill, the Group recognised as a finance lease contract the cost of the Precipitated Calcium Carbonate production unit, installed by Omya, S.A. at the industry site in Setúbal for the exclusive use of the new factory. This contract foresees the transfer of the ownership of the assets upon the end of the contract.
Following the above-mentioned agreements, the Group applies “IFRIC 4 – Determining whether an arrangement contains a lease”. By following this interpretation Property, plant and equipment – equipment and other tangibles was increased by Euro 58,003,950, from which the respective accumulated depreciation of Euro 37,999,683, was deducted as of 31 December 2011 (31 December 2010: Euro 34,161,456). As of 31 December 2011, the net book value of these equipments was Euro 20,004,267 (31 December 2010: Euro 23,842,494).
As of 31 December 2011 Assets under construction included Euro 898,876 (31 December 2010: Euro 485,321), related to advance payments and supplies of Property Plant and Equipment, under the scope of the investment projects being developed by the Group. These amounts are fully guaranteed by first demand bank guarantees, handed by the respective suppliers that are promoting the investments of the Group companies, in accordance with the implemented policies for the mitigation of credit risk.
As of 31 December 2011, Land included Euro 77,679,484 regarding forest land where the Group has installed part of its forestry assets, the remainder being installed on leased land (see note 36.2).
Consolidated Annual Report 2011 112 Translation of a report originally issued in Portuguese – Note 42
18. Biological Assets 1 – Two of the five directors of the company is nominated in representation of the Group. Over the years ended 31 December 2011 and 2010, changes in biological assets were as follows: 2 – A significant part of Soporgen’s sales is made to the Group (at least 10% of the associate’s revenues), and the rest, Amounts in Euro 2011 2010 corresponding to electric energy, is sold to the EDP Group.
Amount as of 1 January 110,502,616 118,289,970 3 – Up to 2011, the Group, as well as the remaining Changes in fair value shareholders, is responsible for Soporgen’s contracted bank Logging in the period (20,328,041) (21,058,399) loan, in the same proportion as its share (note 36). Grow th 9,217,207 6,950,100 New plantations 3,839,591 3,210,386 20. Inventory Other changes in fair value 7,537,934 3,110,559 Total changes in fair value 266,690 (7,787,354) As of 31 December 2011 and 2010, inventory comprised the Amount as of 31 December 110,769,306 110,502,616 following:
The amounts shown as other changes in fair value correspond Amounts in Euro 2011 2010 to changes (positive or negative) in the estimated volume of future wood harvests due to: new plantations, increase or Raw materials 106,030,248 84,293,382 decrease in the forest management efficiency and write-downs Finished and intermediate products 74,290,200 63,525,055 as result of fires. Work in progress 7,040,018 22,409,182 Byproducts and w aste 1,330,460 1,240,632 As of 31 December 2011 and 2010, biological assets were Goods for resale - 120,620 detailed as follows: Advances to inventories' suppliers - 1,310,810 188,690,926 172,899,681 Amounts in Euro 31-12-2011 31-12-2010 As of 31 December 2011, inventories were located in the Eucalyptus 102,948,128 97,048,020 following countries: Pine 6,016,998 8,780,199 Cork 1,542,042 4,012,777 Amounts in Euro 31-12-2011 31-12-2010 Other species 262,138 661,620 Portugal 38,790,437 34,523,720 110,769,306 110,502,616 USA 21,974,981 14,642,837 United Kingdom 4,561,644 2,600,955 19. Available-for-sale financial assets Netherlands 4,151,853 3,752,016 and investments in associates Spain 1,457,738 2,428,754 France 1,399,066 833,499 19.1. Avaliable-for-sale financial assets Italy 1,297,684 871,019 Sw itzerladn 348,827 71,885 As at 31 December 2011 and 2010, this heading was detailed Germany 307,970 3,800,369 as follows: 74,290,200 63,525,055 Subsidiaries 31-12-2011 31-12-2010 Liaison Technologies 126,031 126,074 The amounts shown above are net of impairment losses, in accordance with the policies described in Note 1.13, whose 126,031 126,074 details are presented in Note 23 and include Euro 22,510,902 The participation in Liaison Technologies is recorded at cost, (2010: Euro 16,623,709) regarding inventory whose invoices as the difference (gain) to its fair value is not material as at 31 were already issued, but whose risks and rewards had not yet December 2011. been transferred to customers as of 31 December 2011. Accordingly, no revenue was recognized in the income 19.2. Investments in associates statement as of that date.
21. Receivables and other current In the years ended 31 December 2011 and 2010, the movements in “Investments in associates” were as follows: assets
Amounts in Euro 2011 2010 As of 31 December 2011 and 2010, Receivables and other Amount as of 1 January 516,174 4,000 Acquisitions 755,378 - current assets were detailed as follows: Appropriated income 593,751 (161,904) Dividens received - - Amounts in Euro 31-12-2011 31-12-2010 Other changes in associates' equity (86,646) 674,077 Amount as of 31 December 1,778,657 516,173 Accounts Receivable 204,281,311 164,102,453 Other Accounts Receivable 36,036,227 45,450,689 This caption includes the 18% stake in Soporgen – Sociedade Derivative financial instruments (Note 31) - 240,379 Portuguesa de Geração de Electricidade e Calor, S.A.. This Accrued income 750,959 1,752,337 Deferred costs 1,188,597 1,293,678 company holds a gas power plant at the Figueira da Foz site 242,257,094 212,839,536 that the Group, as mentioned in note 17, considers to be a finance lease and recognises as such in the consolidated The receivables showed above are net of impairment losses, financial statements. in accordance with the policies described in Note 1.14, whose details are presented in Note 23. Although the share represents only 18% of the company’s equity and respective voting rights, the Group recognizes this As of 31 December 2011 and 2010, other receivables were as an associated company as it can influence Soporgen’s detailed as follows: management decisions:
Consolidated Annual Report 2011 113 Translation of a report originally issued in Portuguese – Note 42
Amounts in Euro 31-12-2011 31-12-2010 The significant amount of personal income tax witheld on Advances to employees 570,709 127,051 AICEP - Financial incentives to receive 32,877,046 38,199,792 salaries in 2010, relates to the payment of annual performance Other 2,588,472 7,123,846 bonuses for 2010 during December 2010. 36,036,227 45,450,689 Corporate income tax is detailed as follows: The movements in the balance with AICEP were as follows: Amounts in Euro 31-12-2011 31-12-2010 Amounts in Euro 2011 2010 Corporate income tax (Note 11) 43,489,969 31,278,866 Amount as of 1 January 38,199,792 6,891,182 Payments on account of corporate income tax (25,954,596) (19,178,095) Received in the year (5,322,746) - Withholding tax (990,375) (1,138,508) Increase/(adjustment) - 31,308,610 Other receivables 15,422 (32,395) Amounts as of 31 December 32,877,046 38,199,792 Closing Balance 16,560,420 10,929,868
Of this, Euro 32,536,179 relate to the incentives under the The changes in the provisions for additional tax assessments scope of the contracts signed with AICEP and described in during the years ended 31 December 2011 and 2010 were as Note 9. The remaining relate to receivables under other follows (Note 11): incentives also managed by this Agency. Amounts in Euro 2011 2010 As of 31 December 2011 and 2010, accrued income and Amount as of 1 January 21,198,494 23,369,527 deferred costs were detailed as follows: Increase 12,841,827 - Decrease - (2,171,033) Amounts in Euro 31-12-2011 31-12-2010 Amount as of 31 December 34,040,320 21,198,494 Accrued income Discounts in purchases 223 118,550 The increase in the year is due both to the inclusion of Interest receivable 40,150 882,643 Other 710,586 751,144 additional tax assessments for 2007, 2008 and 2010, as well 750,959 1,752,337 as to the inclusion of interest on the amounts assessed, for De fe r r e d cos ts which a bank guarantee as been presented, in light of the Maintenance and repairs 53,992 58,276 Prepayment of insurance policies 781,229 1,721 change in the calculation of interest introduced by the State Other 353,376 1,233,681 Budget for 2012. 1,188,597 1,293,678 1,939,556 3,046,015 On 31 December 2011 and 2010 the additional tax assessments include interest on deferred payments and are 22. State and other public entities detailed as follows:
As of 31 December 2011 and 2010, there were no overdue Amounts in Euro 31-12-2011 31-12-2010 debts to the State and other public entities. Balances relating Additional assessment 2005 - Portucel - IRC (RETGS) 15,137,029 11,467,446 to these entities were as follows: Additional assessment 2006 - Portucel - IRC (RETGS) 11,407,001 9,279,415 Additional assessment 2007 Portucel - IRC (Municipal Surcharge) 686,257 - Current Assets Additional assessment 2008 - Portucel - IRC (RETGS) 44,613 - Additional assessment 2010 - Portucel - IRC (Municipal Surcharge) 3,027,407 - Additional assessment 2010 - Portucel - IRC (State Surcharge) 1,227,951 - Amounts in Euro 31-12-2011 31-12-2010 Other 2,510,062 451,633 34,040,320 21,198,494 Value added tax - refunds requested 49,454,940 29,994,482 Value added tax - to recover 5,229,184 2,233,548 54,684,123 32,228,030 23. Impairment of non-current and current assets As at 31 December 2011, the outstanding VAT refunds requested comprised the following, by month and by company: During the years ended 31 December 2011 and 2010, changes in impairment charges were as follows: Amounts in Euro Nov/2011 Dec/2011 Total
Adjustments PortucelSoporcel Fine Paper, S.A. 20,950,815 25,797,822 46,748,637 Impairment in Bosques do Atlântico, S.L. - 2,706,303 2,706,303 Tangible Assets Inventories Accounts Receivable Other Amounts in Euro (Note 17) (Note 20) (Nota 21) Receivables Total 20,950,815 28,504,125 49,454,940 As of 1 January 2010 (4,838,615) (887,541) (1,389,949) (1,018,766) (8,134,871) Increase (Note 6) - (6,012) (553,064) (136,005) (695,081) Up to the date of completion of this report, Euro 20,950,815 of Reversal (Note 5) - 284,602 51,791 - 336,393 Direct utilization - - - - - these amounts had already been received. Transfers - - (108,587) - (108,587) As of 31 Decem ber 2010 (4,838,615) (608,951) (1,999,809) (1,154,771) (8,602,146) Increase (Note 6) - (1,111,054) (14,404) (468) (1,125,926) Reversal (Note 5) 5,945 21,559 79,347 555,839 662,690 As at 31 December 2010, the outstanding VAT refunds Direct utilization 4,747,338 - - - 4,747,338 requested comprised the following, by month and by company: Transf ers - - - - - As of 31 Decem ber 2011 (85,332) (1,698,446) (1,934,866) (599,400) (4,318,044)
Amounts in Euro Oct/2010 Nov/2010 Dec/2010 Total 24. Share capital and treasury shares Enerpulp 1,048,382 1,008,966 1,751,737 3,809,084 Portucel 3,404,917 6,443,233 1,412,015 11,260,166 Soporcel - 4,258,429 6,749,682 11,008,111 Portucel is a public company with its shares quoted on the About The Future - - 3,056,878 3,056,878 PortucelSoporcel Cogeração de Energia - 436,733 - 436,733 Euronext Lisbon. Bosques do Atlântico - - 423,510 423,510 4,453,299 12,147,362 13,393,822 29,994,482 As of 31 December 2011, Portucel’s share capital was fully
subscribed and paid for; it is represented by 767,500,000 All these amounts were received during the first-half of 2011. shares with nominal value of 1 Euro each, of which 22,099,932
were held as treasury shares. Current Liabilities
Amounts in Euro 31-12- 2011 31-12- 2010 These shares were mainly acquired during 2008, and the changes were as follows: Corporate income tax 16.560.420 10.929.868 Personal income tax - witheld on sal ari es 635.873 5.526.025 Value added tax 26.369.168 7.475.821 Social security 1.967.632 1.983.113 Additional tax assessments 34.040.320 21.198.494 Other 99.959 2.215.691 79.673.372 49.329.012
Consolidated Annual Report 2011 114 Translation of a report originally issued in Portuguese – Note 42
2011 2010 Amounts in Euro 2011 2010 Quant. Amount Quant. Amount Revaluation Reserve - Fair Value Treasury shares held in January 15,054,358 26,787,706 15,054,358 26,787,706 As of 1 January 78,040 (1,456,243) Accquisitions January - - - - Revaluation at fair value 2,834,646 (652,632) February 188,000 469,490 - - Transfer to the income statement due to the maturity March 979,612 2,454,020 - - oh the instruments (Note 10) (3,435,931) 2,186,915 April 297,906 737,907 - - As of 31 December (523,245) 78,040 May 1,773,671 4,380,142 - - June 883,067 2,073,620 - - July 62,200 151,437 - - Legal reserves August 446,298 808,679 - - September 294,000 509,723 - - October 635,481 1,144,429 - - Under Portuguese Commercial Law, at least 5% of annual net November 893,562 1,280,365 - - profit must be transferred to the legal reserve until it reaches at December 591,777 1,357,457 - - 7,045,574 15,367,269 - - least 20% of the Company’s share capital. This reserve cannot Treasury shares held in 31 December 22,099,932 42,154,975 15,054,358 26,787,706 be distributed unless Portucel is liquidated but can be drawn on to absorb losses, after other reserves are exhausted, or The market value of the treasury shares held on 31 December incorporated in the share capital. 2011 amounted to Euro 44,641,775 (2010: Euro 34,263,719), corresponding to an unit value of Euro 1.389 (31 December Currency Translation Reserve 2010: Euro 2.276). However, had the group held, on 31 December 2010, the number of treasury shares held on 31 This heading includes the exchange differences arising as a December 2011, its value as of that date would amount to result of the conversion to Euros of the financial statements of Euro 50.299.445. the Group companies expressed in foreign currency, at the The market capitalization as of 31 December 2011 amounted rates of exchange prevailing at the date of the statement of to Euro 1,759,110,000 compared to an equity, net of non financial position and are detailed as follows: controlling interests of Euro 1,387,908,237. Amounts in Euro 31-12-2011 31-12-2010 As of 31 December 2011, the shareholders with significant positions in the Company’s capital were as follows: Currency translation reserve Portucel Soporcel Afrique du Nord (MAD) 250 (10) Portucel Soporcel UK (GBP) 4,111 (170,257) 31-12-2011 Soporcel North América (USD) (490,277) 1,051,842 Entity Nº of shares % Entity (485,916) 881,575 Seinpar Investments, BV 241,583,015 31.48% Semapa, SGPS, S.A. 340,571,392 44.37% Other reserves and Prior years’ retained earnings Group Semapa - other entities 2,000 0.00% Bestinver Gestión, SA SGIIC 15,407,418 2.01% Under prevailing law, Portucel’s individual financial statements Zoom Investment 12,295,308 1.60% are prepared in accordance with the accounting principles Treasury shares 22,099,932 2.88% generally accepted in Portugal (PGAAP). However, for the Other shareholders 135,540,935 17.66% preparation of the consolidated financial statements, the Total 767,500,000 100.00% Company follows IFRS as endoresed by the European Union. As of 31 December 2010, the shareholders with significant positions in the Company’s capital were as follows: As of 31 December 2011, the reconciliation between these two sets of accounts was as follows: 31-12-2010 Equity / Retained Entity Nº of shares % Entity Amounts in Euro earnings Net Profit Total Individual financial statements (PGAAP) 1,242,856,131 173,423,894 1,416,280,025 Seinpar Investments, BV 241,583,015 31.48% Ow n shares (6,286,719) - (6,286,719) Seinpart - Participações, SGPS, S.A. 230,839,400 30.08% Revaluation of tangible assets 89,650,459 22,921,962 112,572,421 Financial Incentives for investment (44,189,559) - (44,189,559) Semapa, SGPS, S.A. 105,522,241 13.75% Non-controlling interests (206,193) (14,467) (220,660) Group Semapa - other entities 1,179,800 0.15% Consolidated Financial Statements (IFRS) 1,281,824,119 196,331,389 1,478,155,508 Bestinver Gestión, SA SGIIC 15,443,547 2.01% Treasury shares 15,054,358 1.96% As the individual financial statements are the relevant ones for Other shareholders 157,877,639 20.57% the purpose of determining the distribution capacity of the Total 767,500,000 100.00% Group’s results, this is measured based on the retained
earnings and other reserves determined in accordance with 25. Reserves and retained earnings Portuguese GAAP. It should be noted that the transition to IAS / IFRS has been made in the consolidated financial statements As of 31 December 2011 and 2010, this heading was detailed with reference to 1 January 2005 while the conversion of the as follows: individual financial statements to the current Portuguese GAAP was made with reference to 1 January 2010. This, Amounts in Euro 31-12-2011 31-12-2010 combined with different criteria and concepts between the two Fair value reserve (523,244) 78,040 standards, justifies the difference the equity of the two sets of Legal reserve 57,546,582 47,005,845 financial statements. Currency translation reserve (485,916) 881,575 Net profit: prior years 499,721,012 304,020,378 556,258,434 351,985,838 As of 31 December 2010, the reconciliation between these two sets of accounts was as follows: Fair value reserve Equity / Retained Amounts in Euro earnings Net Profit Total As of 31 December 2011, the Fair value reserve of Euro Individual financial statements (PGAAP) 1,041,513,181 210,758,203 1,252,271,384 523,245, net of deferred taxes of Euro 240,616, represents the Revaluation of tangible assets 112,321,041 (177,978) 112,143,063 Other adjustments (60,694,725) - (60,694,725) decrease in the fair value of financial hedging instruments Non-controlling interests (224,610) 7,855 (216,755) valued at Euro 1,980,230 as of 31 December 2011 (Note 31), Consolidated Financial Statements (IFRS) 1,092,914,887 210,588,080 1,303,502,967 recorded as described in Note 1.11.
The movements occurred in this reserve in the years ended 31 On 31 December 2011 and 2010, the reserves available for December 2011 and 2010, are detailed as follows: distribution were detailed as follows:
Consolidated Annual Report 2011 115 Translation of a report originally issued in Portuguese – Note 42
Amounts in Euro 31-12-2011 31-12-2010 Retained earnings: prior years 385,419,591 178,976,096 385,419,591 178,976,096 Net profit for the period 196,331,389 210,758,203 Legal reserves (9,816,569) (10,537,910) 186,514,819 200,220,293 571,934,410 379,196,389
26. Deferred Taxes
In the years ended 31 December 2011 and 2010, the changes in assets and liabilities as a result of deferred taxes were as follows:
As of 1 January Income Statement As o f 31 D ecember Equity Am ounts in Euro 2011 Increases Decreases 2011 Temporary differences originating deferred tax assets
Tax losses carri ed forwar d 408.173 - (159.717) - 248.456 Taxed provi sions 1.333.951 588.950 - - 1.922.901 Adjustments in fi xed assets 52.478.380 50.880.999 - - 103.359.379 Retirement benefits 3.171.632 78.940 - - 3.250.572 Derivative Financial Instruments - - - 763.861 763.861 Deferred accounting gains on inter-group transactions 10.692.933 9.419.976 - (62.810) 20.050.099 Valuation of biological assets 8.157.968 - (7.461.154) - 696.814 Depreciati on of assets recognised under IFRIC 4 3.631.551 - (3.631.551) - - Investment grants - 16.602.389 - - 16.602.389 79.874.588 77.571.254 (11.252.422) 701.051 146.894.470 Temporary differences originating deferred tax liabilities
Revaluation of fixed assets (19.973.300) - 1.520.474 1.738.456 (16.714.370) Reti rement benefi ts (994.026) (71.070) - 159.358 (905.738) Derivative Financial Instruments (109.529) - - 109.529 - Adjustments in the conversion of PGAAP (29.745.883) - 10.678.465 - (19.067.418) Fair Value of tangible fixed assets - (3.179.438) - - (3.179.438) Tax Benefits (62.087.933) (13.859.014) - - (75.946.947) Extensi on of the useful l ife of the tangible fixed as sets (356.185.011) - 74.940.140 - (281.244.871) Investment incentives - - - (305.739) (305.739) Deferred accounting losses on inter-group transacti ons (104.813.742) (111.271.565) - - (216.085.307) (573.909.424) (128.381.087) 87.139.079 1.701.604 (613.449.828) Am ounts presented on the statement of financial position Deferred tax assets 22.963.945 22.301.734 (3.235.071) 201.552 42.232.160 Effect of the change in tax rate - 4.042.372 (2.774) 4.039.598 22.963.945 26.344.106 (3.235.071) 198.778 46.271.758
Deferred tax liabilities (164.998.958) (36.909.563) 25.052.485 489.211 (176.366.825) Effect of the change in tax rate - (16.712.295) - (157.575) (16.869.870) (164.998.958) (53.621.858) 25.052.485 331.636 (193.236.695)
In the measurement of the deferred taxes as at 31 December 2011, the corporate income tax rate used was 31.50%. In 2010, the deferred taxes were measured at 28.75%, the rate that included the impact of the state tax surcharge introduced as part of the temporary austerity measures under the Stability and Growth Plan (Plano de Estabilidade e Crescimento - PEC), and passed in Law 12- A/2010, notwithstanding the fact that it is the company’s understanding that the reversal of the majority of the existing deferred taxes passed will take place in a period subsequent to that covered by the PEC, that is, after 2013.
Consolidated Annual Report 2011 116 Translation of a report originally issued in Portuguese – Note 42
As of 1 January Income Statement As of 31 Equity Amounts in Euro 2011 Increases Decreases December 2011 Temporary differences originating deferred tax assets
Tax losses carried forw ard 218,900 189,273 - - 408,173 Taxed provisions 6,228,018 - (4,894,067) - 1,333,951 Adjustments in fixed assets 36,986,656 15,491,724 - - 52,478,380 Retirement benefits 2,778,500 451,688 (58,557) - 3,171,632 Derivative Financial Instruments 1,981,284 - - (1,981,284) - Deferred accounting gains on inter-group transactions 4,725,573 5,967,361 - - 10,692,933 Valuation of biological assets 10,127,671 - (1,969,703) - 8,157,968 Depreciation of assets recognised under IFRIC 4 3,983,424 - (351,874) - 3,631,551 67,030,027 22,100,046 (7,274,201) (1,981,284) 79,874,588 Temporary differences originating deferred tax liabilities
Revaluation of fixed assets (23,336,634) - 3,363,334 - (19,973,300) Retirement benefits (1,000,187) (63,747) - 69,909 (994,026) Derivative Financial Instruments - - - (109,529) (109,529) Adjustments in the conversion of PGAAP - (29,745,883) - - (29,745,883) Fair Value of tangible fixed assets (232,991,369) - 232,991,369 - - Tax Benefits (89,442,118) - 27,354,185 - (62,087,933) Extension of the useful life of the tangible fixed assets (147,045,954) (209,139,056) - - (356,185,011) Deferred accounting losses on inter-group transactions (28,603,983) (76,209,759) - - (104,813,742) (522,420,245) (315,158,446) 263,708,888 (39,621) (573,909,424) Amounts presented on the statement of financial position Deferred tax assets 17,762,957 6,353,763 (2,091,333) (569,618) 21,455,769 Effect of the change in tax rate - 1,463,597 - 44,579 1,508,176 17,762,957 7,817,360 (2,091,333) (525,039) 22,963,945
Deferred tax liabilities (138,441,365) (90,608,053) 75,816,305 (11,390) (153,244,503) Effect of the change in tax rate - (11,814,631) - 60,175 (11,754,456) (138,441,365) (102,422,684) 75,816,305 48,785 (164,998,958)
In 2011 and 2010, the Group recognized deferred tax assets on tax losses amounting Euro 272,221 and Euro 408,173 respectively, related to RAÍZ – Instituto de Investigação da Floresta e Papel.
Amounts in Euro 31-12-2011 31-12-2010 Past services liabilities 27. Pensions and other post- - Active Employees 69,500,118 69,670,296 employment benefits - Retired Employees 48,652,860 43,784,857 Market value of the pension funds (104,716,904) (102,854,501) 13,436,074 10,600,652 27.1. Introduction Liabilities w ith retirement bonuses 3,246,711 3,113,104 Unfunded liabilities 16,682,785 13,713,756 There are currently several retirement and survival pension supplement plans, and retirement bonus, in place in the companies included in the consolidation. For some categories On 31 December 2011, the liability related with of employees there are plans in addition to the ones described post-employment benefit plans for five members of Portucel’s below, for which independent funds were also set up to cover Board was Euro 4,629,594 (31 December 2010: Euro the additional liabilities. 4,571,507).
Under the prevailing Social Benefits Regulation, permanent 27.2. Assumptions used in the valuation of the employees of Portucel and its main subsidiaries with more liabilities than five years’ service (ten years for Soporcel, Portucel Soporcel Florestal and Raiz) are entitled to a monthly The actuarial studies carried out by an independent entity for retirement pension or disability supplement after retirement or the purpose of determining the accumulated liabilities as of 31 disability. December 2011 and 2010 were based on the following assumptions: This is calculated according to a formula, which considers the beneficiary’s gross monthly remuneration updated to the work 31-12-2011 31-12-2010 category at the date of retirement and the number of years of service, up to a limit of 30 (limit of 25 to Soporcel, Portucel Disability Table EKV 80 EKV 80 Soporcel Florestal and Raíz), including a survivor pension to Mortality Table TV 88/90 TV 88/90 the spouse and direct descendants. Wage grow th rate 2.00% 2.00% Technical interest rate 5.00% 5.00% To cover this liability, externally managed pension funds were Pensions grow th rate 1.75% 1.50% set up, and the funds’ assets are apportioned between each of the companies. The discount rates used in this study were selected over the Furthermore, some Group companies assumed the liability of return rates of a bonds’ portfolio, namely Markit iBoxx Eur a retirement bonus, which is equal to 6 months of salary, if the Corporates AA 10. From the portfolio, bonds with adequate employee retires on the regular retirement age (65 years). maturity and rating were selected according to the amount and period cash outflows that will occur in connection to the As of 31 December 2011 and 2010, the coverage of the payment of the benefits to employees. companies’ liabilities by the assets of the funds was as follows: During the year ended 31 December 2010 the Group used a technical rate of 5.50% to calculate the costs related to current
Consolidated Annual Report 2011 117 Translation of a report originally issued in Portuguese – Note 42 services. However, due to the behavior of the capital markets Amounts in Euro 31-12-2011 31-12-2010 in this year and its future expectations, the liabilities with pensions were measured using a technical rate of 5.00% as of Bonds 53,455,465 53,164,975 31 December 2010. Shares 19,448,253 22,318,402 Liquidity 31,280,114 27,231,230 Property 14,177 139,864 The rate of the expected return on assets was determined Other applications - short term 518,895 30 based on the historical monthly returns over the last 20 years 104,716,904 102,854,501 for the different types of assets integrating the strategic allocation of the pension’s fund. In the years ended 31 December 2011 and 2010 the effect in the income statement of these plans was as follows: The following table presents a five-year historical information on the present value of liabilities, funds’ market value, non- Amounts in Euro 2011 2010 financed liabilities and net actuarial gains/ (losses): Defined Benefit Plans Amounts in Euro 2007 2008 2009 2010 2011 Current services 2,593,665 2,491,441 Present value of liabilities 141,020,542 143,268,871 149,262,005 116,568,257 121,323,084 Interest expenses 5,551,449 6,119,933 Fair value of plan assets 124,711,410 118,768,323 129,743,758 102,854,501 104,648,182 Expected return of the plan assets (5,089,484) (5,281,785) Surplus/(deficit) (16,309,132) (24,500,548) (19,518,247) (13,713,756) (16,674,902) Transfers and adjustments - (4,894,440) Net actuarial gain/(loss) 14,755,422 (9,849,636) 7,327,298 (128,931) (4,611,183) Other movements 198,683 - 3,254,313 (1,564,851) During the year ended 31 December 2009, Portucel S.A., Defined Contribution Plans Changes in the plan - 3,289,304 presented their employees a proposal to reshape the defined Contribution to the plan 1,058,623 376,888 benefit pension plan to a defined contribution plan. 1,058,623 3,666,192
Costs for the period 4,312,936 2,101,341 Most of the employees accepted this proposal.
The cost regarding contributions to the defined contribution This amendment took effect as of 1 November 2010, plan since 1 January 2010 to 31 December 2010, amounting backdated to 1 January 2009 for the purpose of determining to Euro 3,666,192 was also recognized in that year. This was the liability to be transferred. financed through the allocation of part of the fund to finance
the defined benefit plan, resulting in a further reduction in
27.3. Retirement and pension supplements defined benefit plan costs, registered as transfers and adjustments. The movements in liabilities with retirement and pensions plans in years ended 31 December 2011 and 2010 were as Current service costs include Euro 72.480 (31 December follows: 2010: Euro 69,484) related with three members of the Board.
Amounts in Euro 2011 2010 27.4. Retirement bonuses
Opening balance 113,455,153 146,483,533 Changes in assumptions - (1,123,828) Some of the Group’s companies assumed a liability for the Curtailment - (36,087,119) payment of a retirement bonus, equal to 6 months of salary, if Costs recognized in the income statement 8,145,114 8,611,374 the employee retires at the regular age of retirement (65 Pensions paid (3,580,235) (3,355,640) years). The movements in this liability were as follows: Actuarial gain/(loss) 132,946 (1,073,167) Amounts in Euro 2011 2010 Closing balance 118,152,978 113,455,153 Opening balance 3,113,104 2,778,472 Costs recognised in the income statement 129,921 393,161 The funds set up to cover the above mentioned liabilities had Bonuses paid (54,842) (29,302) the following movement in the years ended 31 December 2011 Other changes 58,528 (29,227) and 2010: Closing balance 3,246,711 3,113,104
Amounts in Euro 2011 2010
Opening balance 102,854,501 129,743,758 28. Provisions Curtailment - (36,087,119) Contributions made in the period 5,948,000 7,906,000 In the year ended 31 December 2011 and 2001 changes in Expected return in the period 5,089,484 5,281,785 provisions were as follows: Actuarial gain/(loss) (5,594,846) (634,283) Pensions paid (3,580,235) (3,355,640) Legal Tax Other Total Amounts in Euro claim s claim s Closing balance 104,716,904 102,854,501 As of 1 January 2010 2,096,956 - 22,063,494 24,160,450 Increases (Note 6) 2,361 10,966,340 11,775,562 22,744,263 The contributions made in the period considered the Reversals (Note 5) (667,610) - (20,911,621) (21,579,231) information received from the actuaries with whom the Group Direct utilizations - - (112,105) (112,105) As of 1 January 2011 1,431,707 10,966,340 12,815,330 25,213,377 manages the funding needs of its several plans. A deficit Increases (Note 6) 383,361 15,761,880 - 16,145,241 recovery plan of the funding levels to the mandatory minimum Reversals (Note 5) (460,842) (21,295,184) - (21,756,026) Direct utilizations - - - - defined by the applicable regulations is being carried out, As of 31 December 2011 1,354,226 5,433,036 12,815,330 19,602,592 when applicable.
The average return of the plan’s funds in 2011 was 0.75% The amount shown as “Others” relates to provisions for risks (2010: 2.21%) with other public entities which may originate cash outflows in the future. The detail of the fund’s assets as at 31 December 2011 and 2010 was as follows: 29. Interest-bearing liabilities
As of 31 December 2011 and 2010, non-current interest- bearing debt comprised the following:
Consolidated Annual Report 2011 118 Translation of a report originally issued in Portuguese – Note 42
Amounts in Euro 31-12-2011 31-12-2010 Non-cur r e nt Bond loans Bond loans 400,000,000 550,000,000 Bank Loans 169,047,619 183,125,000 During 2005, the Group issued five bond loans totalling Euro 569,047,619 733,125,000 700,000,000. The 2005/2008 loan amounting to Euro 25,000,000 was repaid during 2008, as well as the 2005/2010 Expenses w ith the issue of bond loans (2,234,231) (3,392,308) Expenses w ith the issue of other loans (357) (35,785) loan, of Euro 300,000,000, repaid in March 2010. (2,234,588) (3,428,093) In December 2009, Portucel contracted a bond loan 566,813,031 729,696,907 designated “Obrigações Portucel 2010/2015” that was used As of 31 December 2011 and 2010, current interest-bearing only on February 2010, amounting to Euro 100,000,000. The debt was as follows: loan is indexed to the 3-month Euribor, with a designed 40% repayment at the end of the fourth year, and the remaining Amounts in Euro 31-12-2011 31-12-2010 60% at its maturity date. A spread is added to the market Current interest rate according to the level of the Net Debt/EBITDA Bond loans 150,000,000 - Bank loans - short-term 14,085,292 91,250,000 ratio. 164,085,292 91,250,000 In February 2010, Portucel contracted an additional bond loan As of 31 December 2011 and 2010, the Group’s net debt was designated “Obrigações Portucel - 2010 /2015 - 2ª Emissão” detailed as follows: with an amount of Euro 100,000,000 indexed to the 6-month Euribor with a single reimbursement upon maturity, February Amounts in Euro 31-12-2011 31-12-2010 2015. Interest-bearing liabilities Non-current 566,813,031 729,696,907 Current 164,085,292 91,250,000 The loans outstanding as of 31 December 2011, were as 730,898,323 820,946,907 follows: Cash and cash equivalents Re fe r e nce Cash 48,230 45,562 Amounts in Euro Amount Maturity interest rate Short term bank deposits 7,103,485 9,463,348 Bond loans Other 260,280,000 124,450,000 Portucel 2005 / 2012 150,000,000 Oct 2012 Euribor 6m Portucel 2005 / 2013 200,000,000 May 2013 Euribor 6m 267,431,715 133,958,910 Portucel 2010 / 2015 - 2nd emission 100,000,000 Feb 2015 Euribor 6m Portucel 2010 / 2015 100,000,000 Mar 2015 Euribor 3m Treasury shares at their market value (Note 24) 40,641,775 34,263,719 550,000,000 Interest-bearing net debt 422,824,833 652,724,278 The loan amounting to Euro 150,000,000 is quoted in the As of 31 December 2011 and 2010, the interest-bearing Euronext Lisbon under the heading “Obrigações Portucel liabilities of the Group comprised the following: 2005/2012”. As of 31 December 2011 the unit value of this bond was Euro 99.80 (31 December 2010: Euro 99.40). 31-12-2011 Amounts in Euro Non current Current Total Non-current bank loans Interest-bearing liabilities Bond loans 397,765,769 150,000,000 547,765,769 Bank Loans 169,047,262 14,085,292 183,132,554 Portucel contracted a bank loan of Euro 25,000,000 in January 566,813,031 164,085,292 730,898,323 2005 for a period of seven years. The loan will be repaid in 8
31-12-2010 semi-annual instalments of Euro 3,125,000 each, the first of Amounts in Euro Non current Current Total which was due in July 2008. So far 7 semi-annual installments Interest-bearing liabilities were paid. The loan bears interest at a rate corresponding to Bond loans 546,607,692 - 546,607,692 Bank Loans 183,089,215 91,250,000 274,339,215 the Euribor for six months. 729,696,907 91,250,000 820,946,907 In April 2009, Portucel has received Euro 65,000,000 related The evolution of the Group’s net debt in the years ended 31 to a credit facility which had been contracted during 2008 with December 2011 and 2010 was as follows: the European Investment Bank (EIB) designated Portucel – Ambiente Tranche A. In March 2010, Portucel used two contracted credit facilities with the European Investment Bank Amounts in Euro 31-12-2011 31-12-2010 (EIB) of Euro 30,000,000 and Euro 85,000,000 designated BEI
As of 1 January 652,724,278 669,954,905 – Ambiente Tranche B and BEI – Energy, respectively. Changes in value of treasury shares held and accumulated exchange rate adjustments 3,940,378 (7,695,968) The loan designated BEI – Ambiente Tranche A has a 10 year Interest paid 21,688,378 22,258,740 maturity and will be repaid in 14 semi-annual instalments, the Dividens paid and reserves distributed - 179,759,263 Receipts related to investment activities (5,474,411) (10,634,490) first of which will be due 3 years after the loan date, on June Interest received (6,525,765) (7,042,208) 15, 2012, amounting to Euro 4,642,857. The loan bears Payments related to investment activities 62,144,852 50,535,227 interest at a rate corresponding to the Euribor for six months plus a variable spread associated to financial ratios. Net receipts of operating activities (305,673,129) (244,411,190) (229,899,698) (17,230,628) As of 31 December 422,824,581 652,724,278 The loan designated BEI – Ambiente Tranche B has a 14 year maturity and it will be repaid in 18 semi-annual instalments, the The movements in the Group’s net debt for the years ended 31 first of which will be due in December 2012 and the last one on December 2011 and 2010 were as follows: June 15, 2021, each of them amounting to Euro 1,666,667. This loan bears interest at a rate corresponding to the Euribor for six months plus a fixed spread. Amounts in Euro 2011 2010 Net profit of the year 196.345.855 210.580.225 Depreciation, amortization and impairment losses 124.527.404 121.184.784 The loan designated BEI – Energy has a 14 year maturity and Net changes i n provisions (5.610.786) 1.165.032 it will be repaid in 24 semi-annual instalments, the first of 315.262.474 332.930.042 which will be due on June 15, 2013 and the last one on December 15, 2024, each of them amounting to Euro Change in working capital (17.266.336) (64.970.140) Acquisitions of tangible fixed assets (53.796.551) (95.898.081) 3,541,667. This loan bears interest at a rate corresponding to Dividends and reserves distributed - (179.759.263) the Euribor for six months plus a fixed spread. Other changes in equity (6.315.483) 2.131.029 Other (7.984.406) 22.797.041 These two loans are guaranteed by two banks. Change in net debt (Free Cash Flow) 229.899.698 17.230.628
Consolidated Annual Report 2011 119 Translation of a report originally issued in Portuguese – Note 42
Portucel contracted a commercial paper program amounting to As of 31 December 2011 and 2010, “Payables and other Euro 50,000,000, whose emissions are underwritten by a bank current liabilities” were detailed as follows: for a period of three years. As of 31 December 2011, no issues were in place. Amounts in Euro 31-12-2011 31-12-2010 Accounts payable to suppliers 143.591.215 119.182.565 Accounts payable to fixed assets suppliers 32.845.993 38.107.662 The repayment terms related to non-current loans show the Acc ounts payable to fi xed assets suppliers - leases (Note 29) 4.584.418 2.115.500 following maturity profile: Acc ounts payable - r el ated parties (Note 32) 1.452.665 143.086 Derivative financial instruments (Note 31) 4.448.169 189.617 Other creditor s - CO2 emissi ons 4.433.430 6.316.312 Sales comissions 67.844 403.551 Amounts in Euro 31-12-2011 31-12-2010 Other creditors 1.864.581 2.581.605 Acc rued costs 36.993.781 33.856.509 Non cur r e nt Deferred income 54.611.282 61.943.025 1 to 2 years 219,702,381 164,077,381 284.893.378 264.839.433
2 to 3 years 59,702,381 219,702,381 As of 31 December 2011 and 2010, accrued costs and 3 to 4 years 179,702,381 59,702,381 deferred income were detailed as follows: 4 to 5 years 109,940,476 179,702,381 Amounts in Euro 31-12-2011 31-12-2010 More than 5 years - 109,940,476 Accrued costs 569,047,619 733,125,000 Payroll expenses 31,016,633 18,539,655 Interests payable, including compensatory interest 3,997,370 4,057,165 Energy, Gas and maintenance - 5,656,207 As of 31 December 2011, the Group had available but unused Other 1,979,778 5,603,482 36,993,781 33,856,509 credit lines amounting to Euro 32,450,714 (31 December Deferred income 2010: Euro 32,450,714). Government grants (Note 9) 54,103,383 60,694,725 Other 507,899 1,248,300 Finance lease – IFRIC 4 54,611,282 61,943,025
As of 31 December 2011 and 2010, the Group showed the As of 31 December 2011 and 2010, deferred income on following equipments under finance lease plans recognized government grants was detailed per company as follows: under IFRIC 4: Amounts in Euro 2011 2010 31-12-2011 AICEP investment contracts (Note 9) Acquisition Accumulated Net book Portucel, S.A. 31,451,427 34,954,669 Amounts in Euro Value depreciation value SoporcelPulp, S.A. 16,602,389 18,061,207 Soporcel, S.A. 5,845,140 7,154,495 Equipment - Soporgen 44,003,950 (35,203,160) 8,800,790 53,898,956 60,170,371 Equipment - Omya 14,000,000 (2,796,523) 11,203,477 58,003,950 (37,999,683) 20,004,267 Other Portucel, S.A. 21,031 66,966 Detalhe da Locação Financeira 31-12-2010 Raiz 183,395 388,393 Acquisition Accumulated Net book Enerforest, S.A. - 58,558 Amounts in Euro Value depreciation value Cofotrans, S.A. - 10,437 204,427 524,354 Equipment - Soporgen 44,003,950 (32,269,564) 11,734,386 54,103,383 60,694,725 Equipment - Omya 14,000,000 (1,891,892) 12,108,108 58,003,950 (34,161,456) 23,842,494 During the year ended 31 December 2011 and 2010, Grants – The non-current and current liabilities related to those CO2 emissions had the following movements: equipments are recorded under “Other liabilities” and “Payables and other current liabilities”, respectively, and are Amounts in Euro 2011 2010 detailed as follows: Grants - CO2 emissions Opening balance - - Amounts in Euro 31-12-2011 31-12-2010 Increase 12,630,672 12,808,389 Utilization (12,630,672) (12,808,389) Non-Current 18,109,324 24,471,153 Closing balance - - Current (Note 30) 4,584,418 2,115,500 22,693,742 26,586,653 31. Financial assets and liabilities
The Group holds a stake of 18% on Soporgen – Sociedade As its activities are exposed to a variety of financial and Portuguesa de Geração de Electricidade e Calor, S.A., whose operational risk factors, the Group adopts a proactive main activity is the production of steam and electric power, approach to risk management, as a way to mitigate the exclusively sold to Soporcel. potential adverse effects associated with those risks, namely the risk arising from the price of pulp, foreign exchange risk Soporcel has a call option for the remaining share capital of and interest rate risk. Soporgen until the end of the agreement to supply electric and steam power, signed between Soporgen and Soporcel. The The reconciliation of the consolidated statement of financial st settlement date of this option is on January 1 of each year position with the various categories of financial assets and between 2010 and 2015, by pre-determined amounts. liabilities included therein is detailed as follows:
In 2009, with the launch of the new paper mill, the Group recognized as a finance lease contract the cost of the Precipitated Calcium Carbonate production unit, installed by Omya, S.A. at the industry site in Setúbal for the exclusive use of the new mill. This contract foresees the transfer of the assets’ ownership to About The Future, S.A., upon its termination.
30. Payables and other current liabilities
Consolidated Annual Report 2011 120 Translation of a report originally issued in Portuguese – Note 42
Financial Financial Other interest- Instruments - instrum ents- Loans and Financial asstes bearning Non financial month, customer and suppliers’ balances expressed in foreign trading hedging receivables held-for-sale liabilities Assets/liabilities Amounts in Euro Note 31.1. Note 31.2. Note 31.3. Note 19 Note 31.4. currency are updated, with the gain or loss offset against the 31-12-2011 Assets Financial assets held-for-sale - - - 126,031 - - fair value of the forwards negotiated. Other non - current asstes ------Current receivables - - 508,688,809 - - 243,375,049 Total - - 508,688,809 126,031 - 243,375,049 Liabilities The net fair value of trading instruments – forwards – as at 31 Non-current interest-bearning liabilities - - - - 566,813,031 - Other liabilities - - - - 19,045,446 229,522,072 December 2011 is negative by Euro 2,467,939 (31 December Current interest-beraning liabilities - - - - 164,085,292 - State entities - - - - - 79,673,372 Current payables (2,467,939) (1,980,230) - - 193,881,173 85,627,915 2010: Euro 58,767). Total (2,467,939) (1,980,230) - - 943,824,942 394,823,359 31-12-2010 Assets 31.3. Derivative financial instruments designated Financial assets held-for-sale - - - 126,074 -- Other non - current asstes - - - - - 2,114,963,332 Current receivables 130,850 109,529 375,740,082 - - 175,945,696 as hedging instruments Total 130,850 109,529 375,740,082 126,074 - 2,290,909,028 Liabilities Non-current interest-bearning liabilities 729,696,907 Other liabilities 24,471,153 203,926,091 As of 31 December 2011 and 2010, the fair value of derivative Current interest-beraning liabilities 91,250,000 State entities - 49,329,012 Current payables 189,617 184,167,136 80,482,680 financial instruments designated as hedging instruments (Note Total 189,617 - - - 1,029,585,196 333,737,783 1.11) was as follows:
31-12-2011 31-12-2010 Except for derivative financial instruments, the remaining Amounts in Euro Notional Positive Negative Net Net financial instruments are recorded at cost on the grounds that Hedging Foreign exchange forw ards 19,360,074 - (614,563) (614,563) - this is considered to be a reasonable approximation to their fair Foreign exchange hedging - Future 80,493,083 - (1,365,667) (1,365,667) 109,529 value. 99,853,157 - (1,980,230) (1,980,230) 109,529
31.1. Fair value hierarchy On 31 December 2011, the hedging instruments in place showed a negative fair value of Euro 1,980,230, mainly related The following table presents the Group’s assets and liabilities to a forward instrument designed to hedge the exchange measured at fair value at 31 December 2011, according to the translation risk of Portucel Soporcel North America’s following fair value hierarchies: shareholder’s equity.
i. Level 1: Fair value of financial instruments is based 31.4. Credit and receivables on prices ruling on active, liquid markets at the date of the statemet of financial position; These amounts are initially recognised at fair value, and ii. Level 2: Fair value of financial instruments is not subsequently measured at amortized cost less any impairment determined on the basis of active market prices, but losses identified during the course of the credit risk analysis of rather resorting to valuation models. The main inputs the credit portfolios held (Note 23). of the models used are observable in the market, and 31.5. Other financial liabilities iii. Level 3: Fair value of financial instruments is not determined on the basis of active market prices, but These items are recognised at their amortized cost, rather resorting to valuation models, the main inputs corresponding to the value of the respective cash flows of which are not observable in the market discounted at the effective interest rate associated with each of the liabilities (Note 29). Amounts in Euro 31-12-2011 Level 1 Level 2 Level 3 Financial asstes at fair value through profit or loss Financial instruments-trading - - - - Financial instruments-hedging - - - - 31.6. Net gains on financial assets and liabilities -- - - Amounts in Euro 31-12-2011 Level 1 Level 2 Level 3 The effect in net income for the year of the financial assets and Financial asstes at fair value through profit or loss liabilities held is detailed as follows: Financial instruments-trading (2,467,939) - (2,467,939) - Financial instruments-hedging (1,980,230) - (1,980,230) - (4,448,169) - (4,448,169) - Amounts in Euro 2011 2010
Gain/ (loss) on loans and receivables 5,812,520 186,947 31.2. Financial instruments held for trading Gains / (losses) on financial instruments - hedging (3,435,931) (2,186,915) Gains / (losses) on financial instruments - trading (2,409,172) 1,320,395 Inter es t Inc ome: As of 31 December 2011 and 2010, the fair value of derivative From deposits and other receivables 7,505,282 2,062,276 Interest expense: financial instruments (Note 1.11) was as follows: Financial liabilities measured at amortized cost (22,763,525) (21,535,218) Other (1,055,628) 73,098 31-12-2011 31-12-2010 (16,346,454) (20,079,417) Amounts in Euro Notional Positive Negative Net Net Trading The fair value of derivative financial instruments is included in Foreign exchange forw ards 78,227,718 - (2,467,939) (2,467,939) (58,767) 78,227,718 - (2,467,939) (2,467,939) (58,767) “Receivables and other current assets” (Note 21) and “Payables and other current liabilities” (Note 30). The Group has a currency exposure on sales invoiced in foreign currencies, namely US dollars (USD) and pounds The movement in the balances recognized in the statement of sterling (GBP). Since the Group’s financial statements are financial position (Notes 21 and 30) relating to financial translated into Euro, it runs an economic risk on the instruments was as follows: conversion of these currency flows to the Euro. The Group is Change in fair value Change in fair value also obliged, albeit to a lesser degree, to make certain Total payments in those same currencies which, for currency (Trading) (Hedging) Opening balance (1,379,160) (1,981,284) (3,360,444) exposure purposes, act as a natural hedge. Thus, the hedge is Maturity (Note 10) 1,320,393 2,186,915 3,507,308 aimed at safeguarding the net value of the statement of Decrease in fair value - (96,102) (96,102) financial position items denominated in foreign currencies Closing balance (58,767) 109,529 50,762 Maturity (Note 10) (2,409,172) (3,435,931) (5,845,103) against the respective currency fluctuations. Decrease in fair value - 1,346,172 1,346,172 Closing balance (2,467,939) (1,980,230) (4,448,169) The hedging instruments used in this operation are foreign exchange forward contracts covering the net exposure to the As at 31 December 2011 and 2010, the derivative financial foreign currencies at the time the invoices are issued, for the instruments previously summarised presented the following same maturity dates and the same amounts of these maturities: documents in such a way as to fix the exchange rate associated with the sales. The nature of the risk hedged is the book exchange rate variation recorded on sales and purchases expressed in foreign currencies. At the end of each
Consolidated Annual Report 2011 121 Translation of a report originally issued in Portuguese – Note 42
31-12-2011 31-12-2010 Nominal value Maturity Type Fair Value Fair Value Within this context, a EU Directive was issued that foresees Foreing Exchange Forw ards USD - - Trading - 123,396 the trade of CO2 emission rights. This Directive has been GBP - - Trading - 7,455 USD 5,350,000 7-Feb-12 Trading (235,962) (268,405) transposed to the Portuguese legislation, with effect from 1 GBP - - Trading - 78,787 USD 69,506,000 30-Apr-12 Trading (1,818,164) - January 2005, and impacts, amongst other industries, on the GBP 17,019,000 27-Mar-12 Trading (413,813) - pulp and paper industry (Note 30). (2,467,939) (58,767) Foreing Exchange Forw ards - Subsidiaries investments USD 25,050,000 30-May-12 Hedging (614,563) 109,529 Foreing Exchange Forw ards USD 37,350,000 30-Sep-12 Hedging (688,902) - As a result of negotiations of the National Plan for the USD 41,600,000 31-Oct-12 Hedging (581,028) - Allocation of CO2 Emission Rights (PNALE), for the period USD 25,200,000 31-Dec-12 Hedging (95,737) - (1,980,230) 109,529 2008-2012, the Group was awarded licences corresponding to (4,448,169) 50,762 531,049 tons for each year of the period (Note 16). With the start of the new units in the area of energy and in the 32. Balances and transactions with production of paper, this attribution was revised upwards to 892,627 tons. related parties
The following is a breakdown of related parties’ balances as of 34. Audit fees 31 December 2011 and 2010: In the period ended 31 December 2011 and 2010, expenses 2011 2010 with statutory audits, other audit services and tax advisory Assets Liabilities Assets Liabilities services, were as follows: Amounts in Euro Receivables Payables Receivables Payables Amounts in Euro 2011 2010 Semapa 721 1,452,665 - 143,086 Statutory auditors services 721 1,452,665 - 143,086 Statutory audit services 374,696 275,507 Audit of foreign subsidiaries 177 728 118 119 In the year ended 31 December 2011 and 2010, transactions Tax advisory services with related parties were as follows: Portugal 148 175 79,149 Foreign subsidiaries 45 180 7,219 Other assurance services 68 354 80 776 2011 2010 814,133 560,769 Sales Cosumed Sales Cosumed and services materials and services materials Amounts in Euro rendered and services rendered and services The services described as tax advisory and other, mainly comprise of the support in complying with tax obligations, in Semapa 5,551 2,116,582 38,174 1,599,100 Portugal and abroad, as well as in services regarding the 5,551 2,116,582 38,174 1,599,100 validation of investment expense claims to present to AICEP, to enable the receipt of the incentives contracted, as described in note 9.
33. Environmental related expenditure The Board of Directors believes there are adequate procedures safeguarding the independence of auditors Environmental costs through the audit committee process analysis of the work proposed and careful definition of the work to be performed by As part of its business operations, the Group incurs in several the auditors. environmental expenditure which, depending on their nature, are capitalised or recognised as costs in the operating results 35. Number of employees for the year. As of 31 December 2011 the number of employees working for Environmental expenses incurred by the Group in order to the various Group companies was 2,290 (31 December 2010: preserve resources or to avoid or reduce future damage, are 2,331), of which 284 were employed by About The Future, capitalised when they are expected to extend the useful life or S.A. and 75 in foreign subsidiaries. to increase the capacity, safety or efficiency of other assets held by the Group. 36. Commitments The expenditure capitalized and expensed in the year ended 31 December 2011 and 2010 was as follows: 36.1. Commitments in favour of third-parties
Amounts in Euro 2011 2010 As of 31 December 2011 and 2010, the Group had presented the following bank guarantees to the following entities: Generator of the oil boiler 57,884 576,931 Recovery boiler 80,187 - Expansion of w astew ater treatment equipment 109,182 18,731 Amounts in Euro 31-12-2011 31-12-2010 Improvement of facilities and security 11,278 42,872 Others 113,265 47,118 In favour of associated companies 371,796 685,653 Soporgen, S.A. - 333,333 Amounts in Euro 2011 2010 - 333,333 Treatment of w astew ater 8,173,029 7,543,581 In favour of third parts Recycling of materials 1,457,788 1,699,098 Water resources charges (Note 6) 2,016,732 1,098,185 Expenses electrostatic 558,917 548,023 Portuguese Tax authorities 32,995,209 27,917,200 Electrofilters 360,903 286,241 Duties w ith w ood imports 3,593,131 3,531,019 Sew erage 41,515 103,150 Simria 327,775 340,005 Other 107,886 443,993 Other 639,101 792,590 12,716,770 11,722,271 37,555,215 32,580,814 CO2 emission rights 37,555,215 32,914,147
As part of the Kyoto Protocol, the European Union has On 3 May 2000, Soporcel, entered into a guarantee with a committed itself to reduce greenhouse gases’ emissions. bank under which it guaranteed the full and timely compliance
Consolidated Annual Report 2011 122 Translation of a report originally issued in Portuguese – Note 42 with all financial and monetary obligations to that bank of such expenses. In this context, the aforementioned Fund is assumed by Soporgen – Sociedade Portuguesa de Geração liable for Euro 33,861,034, detailed as follows: de Electricidade e Calor, S.A.. Accordingly, the bank could Amounts Period 1st Refund Outstanding claim repayment of up to 8% of Soporgen’s debt under that Amounts in Euro Requested guarantee whenever it was enforced. As the loan was repaid in Portucel VAT Germany 1998-2004 5,850,000 (5,850,000) - 2011, the corresponding guarantee was cancelled. Corporate Income Tax 2001 314,340 - 314,340 Corporate Income Tax 2002 625,033 (625,033) - Value added tax 2002 2,697 (2,697) - The guarantees granted to the Portuguese Tax Authorities are Corporate Income Tax 2003 1,573,165 (1,573,165) - Corporate Income Tax 2003 197,395 (157,915) 39,480 detailed as follows (Note 37): Corporate Income Tax (Withheld) 2004 3,324 - 3,324 Corporate Income Tax 2004 766,395 - 766,395 Amounts in Euro 31-12-2011 31-12-2010 Corporate Income Tax (Withheld) 2005 1,736 (1,736) - Corporate Income Tax 2005 11,754,680 - 11,754,680 Income Tax 2005 - Additional Tax Assessment 14,656,907 14,656,907 Corporate Income Tax 2006 11,890,071 - 11,890,071 Income Tax 2006 - Additional Tax Assessment 11,823,199 11,831,696 Expenses 190,984 - 190,984 33,169,820 (8,210,546) 24,959,274 Income Tax 2007 - Municipal surcharge 853,023 852,727 Soporcel Stamp Duty 2004 575,870 575,870 Corporate Income Tax 2002 169,219 - 169,219 Income Tax 2010 - self liquidation 5,086,210 - Corporate Income Tax (Replacement income tax claim) 2003 5,725,771 - 5,725,771 Value added tax 2003 2,509,101 - 2,509,101 32,995,209 27,917,200 Stamp duty 2004 497,669 - 497,669 8,901,760 - 8,901,760 42,071,580 (8,210,546) 33,861,034 36.2. Purchase commitments
In addition to the commitments described in the preceding 37.1.2. Stamp Duty on loans – Stamp Duty on capital – Note, purchase commitments assumed with suppliers at 31 77.000 Euros December 2011 amounted to Euro 18,078,553 and referred to capital expenditure on Property, plant and equipment. In 2010 these commitments amounted Euro 14,501,506 and mainly On 7 April 2008, SPCG and PortucelSoporcel Cogeração de comprised investments under agreements with AICEP, that Eneragia, S.A. presented a Judicial Appeal to the foresaw global capital expenditure of some Euro 914.600.000. Administrative Court of Almada, regarding stamp duty settlements on the capital increase of these companies As of 31 December 2011 and 2010, commitments relating to amounting to Euro 50,000 and Euro 27,000, respectively, as operating lease contracts comprised the following: the charge is contrary to the European Council Directive No. 69/335/EEC, of 17 July 1969, as amended by the Council Amounts in Euro 31-12-2011 31-12-2010 Directive 85/303/EEC of 10 June 1985.
2011 - 1,533,053 Regarding PortucelSoporcel Cogeração de Eneragia, S.A., a favourable decision was issued on 27 October 2011. 2012 1,646,206 1,549,391
2013 1,157,765 898,107 As for SPCG, the constitution of an Arbitration Court was 2014 664,999 600,959 requested on 9 August 2011, and produced a favourable 2015 190,006 325,786 decision on 11 November 2011. 3,658,975 4,907,296 The tax authorities appealed from the decision of the arbitration court. As of 31 December 2011 and 2010, commitments relating to forestry land rents comprised the following: 37.1.3. Value Added Tax (VAT) – 2.509.101 Euros Amounts in Euro 31-12-2011 31-12-2010 2011 - 2,196,627 On 19 September 2006, Soporcel was subjected to an 2012 3,432,711 1,990,593 additional VAT settlement amounting Euro 2,509,101 including 2013 3,163,830 1,876,164 compensatory interest of Euro 227,759. According to the Company’s understanding, the additional tax is undue as it 2014 2,816,056 1,690,656 regards deducted VAT in forestry plantations, to which the 2015 2,685,971 1,544,779 article 24 of the VAT does not apply as it does not qualify as a 2016 2,610,094 1,396,174 tangible asset. Based on these arguments, a Judicial Appeal Later 26,398,899 16,707,731 was presented on 26 December 2007. On 12 January 2012, a 41,107,560 27,402,724 favourable decision was issued, to which the tax authorities presented an appeal on 24 January 2012. 37. Contingent assets 37.1.4. Municipal surcharge (RETGS) 2008 / 2009 – Euro 37.1. Tax matters 1,062,068
37.1.1. Public Debt Settlement Fund In 2008 and 2009 Portucel presented the Income Tax form with a Municipal surcharge corresponding to the sum of the According to Decree-Law no. 36/93 of 13 February, the tax individual municipal surcharge of the companies included in debts of privatised companies relating to periods prior to the the special tax regime applicable to groups of companies privatisation date (in the case of Portucel, 25 November 2006) (RETGS) in accordance with the tax autorithies understanding, are the responsibility of the Public Debt Settlement Fund. (Circular Letter No. 20132 as of 14 April 2008). Portucel submitted an application to the Public Debt Settlement Fund on 16 April 2008 requesting the payment by Nevertheless, Portucel believes this municipal surcharge the State of the tax debts raised by the tax authorities for shoud correspond to 1.5% of the Group’s aggregated taxable periods before that date. On 13 December 2010, Portucel income, as stated by the Law nº2/2007 (Local Finance Law). presented a new application requesting the payment of debts settled by the tax authorities regarding 2006 and 2003. This Due to this, Portucel presented a tax claim in order to collect application was supplemented on 13 October 2011, with the the refund of the excess amounts paid amounting to Euro amounts already paid and uncontested regarding these debts, 173,868 and Euro 888,200. as well as with expenses directly related to them, pursuant to court rulling dated 24 May 2011 (Case No. 0993A/02), which Following the initial rejection of the claim, on 14 May 2010 and confirmed the company's position regarding the enforceability 6 January 2011, Portucel presented the corresponding
Consolidated Annual Report 2011 123 Translation of a report originally issued in Portuguese – Note 42
hierarchical appeals, which, once denied, were followed by a Amounts in Euro Year Amount request for the constitution of the Arbitration Court to rule on Stamp duty 2008 50,000 the cases, whose decision is pending. Corporate Income Tax 2002 157,656 Corporate Income Tax - Municipal Surcharge 2007 682,182 On 2 February 2011 the Supreme Administrative Court Corporate Income Tax - Municipal Surcharge 2010 2,829,353 Corporate Income Tax - Municipal Surcharge 2008 173,868 decided in favour of Portucel’s views, in a similar case. Corporate Income Tax - Municipal Surcharge 2009 888,200 Therefore, a successful outcome is expected for this claim. Corporate Income Tax 2003 24,315 Corporate Income Tax 2004 111,543 Regarding 2010, the Group decided not to pay the excess IRC - RETGS - Self liquidation 2008 138,404 amount of Euro 2,829,353, and presented the the Corporate Income Tax 2001 314,340 corresponding administrative appeal on the amount resulting 5,369,861 from the excess of the liquidation and requested the establishment of bank guarantee for the amount not settled. 37.2. Non-tax matters Following the rejection of the claim, the Group requested the constitution of an Arbitration Court on 2 January 2012. 37.2.1. Public Debt Settlement Fund
37.1.5. State surcharge – 1.147.617 Euros In addition to the tax matters described above, a second request to the Public Debt Settlement Fund was submitted on 2 June 2010, which called for the reimbursement of various In the 2010 income tax form presented by Portucel, a state amounts, totaling Euro 136,243,939. These amounts related to surcharge of Euro 1,147,617 was determined regarding About adjustments in the financial statements of the group after its The Future – Empresa Produtora de Papel, S.A., which is privatization, that had not been considered in formulating the considered undue by the Group as it should have been price of such privatization as they were not included in the deducted to tax benefits granted by AICEP to the company. documentation made available for consultation by the bidders. AICEP seconds the company’s views on this matter.
Due to this, Portucel presented a tax claim in order to collect 37.2.2. Infrastructure enhancement and maintenance fee the refund of this excess income tax amount paid in 2010. Following the rejection of that claim, Portucel presented the Under the licensing process nº 408/04 related to the new corresponding hierachical appeal, on 14 November 2011, paper mill project, the Setubal City Council issued a settlement whose decision is still pending. note to Portucel regarding an infrastructure enhance and maintenance fee (“TMUE ") amounting to Euro 1,199,560, with 37.1.6. Investment Contracts with AICEP which the company disagrees.
This situation regards the amount collected under this concept Regarding the contracts signed with AICEP and up to 31 in the licensing process mentioned above, for the construction December 2011, a total amount of Euro 25,730,549 of tax of a new paper mill in the industrial site of Mitrena, Setúbal. incentives is yet to be recognized until 2016. Portucel disagrees with the amount charged and filled an administrative claim against it on 25 February 2008 (request 37.1.7. Tax relief on investment activities (RFAI) 2009- 2485/08), followed by an appeal to Court against the rejection 2011 of the claim on 28 October 2008.
In the appeal, Portucel claims the cancelation of the settlement In 2009 and 2010, the Group benefited from the tax relief on the following grounds: (i) desproporcionality of the fee mechanism for relevant investments as set by Law No. applied; (ii) it has the nature of a tax, that cannot be imposed 10/2009 of by the City Council and (iii) the absence of any consideration 10 March. Under this regime, the Group has unused benefits paid on their behalf by the Setúbal City Council since it was amounting to Euro 10,780,989, which can be used until 2015. Portucel that supported all the costs regarding the urban The Group expects to use some Euro 3,172,900 in 2011, infrastructure and maintenance, thus proving that the TMUE being the benefit of this regime generated in 2011 of some configures a true tax. Euro 2,500,000. The decision of the Court is stil pending.
37.2.3 Insurance Compensation 37.1.8. Proceedings in Arbitration Court
Following the approval of Decree-Law No. 10/2011 of 20 On 31 December 2011, there were pending compensations by January, which introduced in the Portuguese legal system, equipment damage amounting to Euro 4,276,764, validated by arbitration courts to rule on tax matters, the Group submitted to the respective insurance companies but not recognized. The these courts a number of tax cases totaling Euro 5,369,860, recognition of this amount is contingent to repair works to be detailed as follows: carried out in 2012.
38. Exchange rates
The assets and liabilities of the foreign subsidiaries and associated companies expressed in a functional currency other than Euro were translated to Euro at the exchange rate prevailing on 31 December 2011.
The income statement transactions were translated at the average rate for the year. The differences arising from the use of these rates compared with the balance prior to the conversion were reflected under the Currency translation reserve in shareholders’ equity.
The rates used on 31 December 2011 and 2010, against the Euro, were as follows:
Consolidated Annual Report 2011 124 Translation of a report originally issued in Portuguese – Note 42
Valuation / 2011 2010 (depreciation) GBP (sterling pound) Average exchange rate for the year 0.8679 0.8579 (1.17%) Exchange rate at the end of the year 0.8353 0.8572 2.55% USD (american dollar) Average exchange rate for the year 1.3920 1.3265 (4.94%) Exchange rate at the end of the year 1.2939 1.3377 3.27% PLN (polish zloti) Average exchange rate for the year 4.1205 3.9896 (3.28%) Exchange rate at the end of the year 4.4580 3.9580 (12.63%) SEK (sw edish krona) Average exchange rate for the year 9.0308 9.5365 5.30% Exchange rate at the end of the year 8.9120 8.9809 0.77% CZK (czech koruna) Average exchange rate for the year 24.5906 25.2550 2.63% Exchange rate at the end of the year 25.7870 25.0000 (3.15%) CHF (sw iss franc) Average exchange rate for the year 1.2324 1.3807 10.74% Exchange rate at the end of the year 1.2156 1.2488 2.66% DKK (danish krone) Average exchange rate for the year 7.4507 7.4470 (0.05%) Exchange rate at the end of the year 7.4342 7.4532 0.25% HUF (hungarian florim) Average exchange rate for the year 279.3789 275.0925 (1.56%) Exchange rate at the end of the year 314.5800 277.9800 (13.17%) AUD (australian dollar) Average exchange rate for the year 1.3485 1.4424 6.51% Exchange rate at the end of the year 1.2723 1.3074 2.68% MZM (Mozambique metical) Average exchange rate for the year 40.9907 47.7740 14.20% Exchange rate at the end of the year 35.9200 46.5900 22.90%
Consolidated Annual Report 2011 125 Translation of a report originally issued in Portuguese – Note 42
39. Companies included in the consolidation
Percentage of capital held by Group companies Company Head office Directly Indirectly Total
Parent-Company: Portucel – Empresa Produtora de Pasta e Papel, SA Setúbal - - -
Subsidiaries: Soporcel - Sociedade Portuguesa de Papel, SA Figueira da Foz 100.00 - 100.00 PortucelSoporcel Floresta, SGPS, SA Figueira da Foz 50.00 50.00 100.00 Soporcel Pulp - Sociedade Portuguesa de Celulose, SA Figueira da Foz 100.00 - 100.00 Portucel Florestal – Empresa de Desenvolvimento Agro-Florestal, SA Setúbal 100.00 - 100.00 CountryTarget SGPS SA Setúbal 100.00 - 100.00 Sociedade de Vinhos da Herdade de Espirra - Produção e Comercialização de Vinhos, SA Setúbal - 100.00 100.00 PortucelSoporcel Florestal – Sociedade para o Desenvolvimento Agro-Florestal, SA Setúbal - 100.00 100.00 Afocelca - Agrupamento complementar de empresas para protecção contra incêndios ACE Portugal - 64.80 64.80 Enerforest - Empresa de Biomassa para Energia, SA Setúbal - 100.00 100.00 Atlantic Forests, SA Setúbal - 100.00 100.00 Viveiros Aliança - Empresa Produtora de Plantas, SA Palmela - 100.00 100.00 Aflomec - Empresa de Exploração Florestal, SA Setúbal - 100.00 100.00 Cofotrans - Empresa de Exploração Florestal, SA Figueira da Foz - 100.00 100.00 Raiz - Instituto de Investigação da Floresta e Papel Aveiro - 94.00 94.00 Bosques do Atlantico, SL Spain - 100.00 100.00 PortucelSoporcel Pulp SGPS, S.A. Setúbal 100.00 - 100.00 CELSET - Celulose de Setúbal, S.A. Setúbal - 100.00 100.00 CELCACIA - Celulose de Cacia, S.A. Aveiro - 100.00 100.00 Portucel International GmbH Germany - 100.00 100.00 PortucelSoporcel Papel, SGPS SA Setúbal 100.00 - 100.00 Portucel Soporcel North America Inc. USA - 100.00 100.00 About the Future - Empresa Produtora de Papel, SA Setúbal - 100.00 100.00 Portucel Papel Setúbal, S.A. Setúbal - 100.00 100.00 PortucelSoporcel Sales & Marketing NV Belgium 25.00 75.00 100.00 PortucelSoporcel Fine Paper , S.A. Setúbal - 100.00 100.00 PortucelSoporcel España, SA Spain - 100.00 100.00 PortucelSoporcel International, BV Netherlands - 100.00 100.00 PortucelSoporcel France, EURL França - 100.00 100.00 PortucelSoporcel United Kingdom, Ltd United Kingdom - 100.00 100.00 PortucelSoporcel Italia, SRL Italy - 100.00 100.00 Soporcel 2000 - Serviços Comerciais de Papel, Soc. Unipessoal, Lda Figueira da Foz - 100.00 100.00 PortucelSoporcel Deutschland, GmbH Germany - 100.00 100.00 PortucelSoporcel Handels, GmbH Austria - 100.00 100.00 PortucelSoporcel Afrique du Nord Morocco - 100.00 100.00 PortucelSoporcel Poland SP Z O Poland - 100.00 100.00 PortucelSoporcel Sw itzerland, Ltd Sw itzerland 0.00 100.00 100.00 PortucelSoporcel Energia, SGPS SA Setúbal 100.00 - 100.00 SPCG – Sociedade Portuguesa de Co-Geração Eléctrica, SA Setúbal - 100.00 100.00 Enerpulp – Cogeração Energética de Pasta, SA Setúbal - 100.00 100.00 PortucelSoporcel Cogeração de Energia, SA Setúbal - 100.00 100.00 PortucelSoporcel Participações, SGPS SA Setúbal 100.00 - 100.00 Arboser – Serviços Agro-Industriais, SA Setúbal - 100.00 100.00 Empremédia - Corretores de Seguros, Lda Lisboa - 100.00 100.00 Socortel - Sociedade de Corte de Papel, SA Figueira da Foz - 100.00 100.00 Cutpaper - Transformação, Corte e Embalagem de Papel, ACE Figueira da Foz - 50.00 50.00 Headbox - Operação e Contolo Industrial, SA Setúbal - 100.00 100.00 EMA21 - Engenharia e Manutenção Industrial Século XXI, SA Setúbal - 100.00 100.00 Ema Cacia - Engenharia e Manutenção Industrial, ACE Aveiro - 91.15 91.15 Ema Setúbal - Engenharia e Manutenção Industrial, ACE Setúbal - 92.56 92.56 Ema Figueira da Foz- Engenharia e Manutenção Industrial, ACE Figueira da Foz - 91.47 91.47 EucaliptusLand, SA - 100.00 100.00 PortucelSoporcel Serviços Partilhados, SA Figueira da Foz - 100.00 100.00 PortucelSoporcel Internacional SGPS SA Setúbal 100.00 - 100.00 Portucel Moçambique - Sociedade de Desenvolvimento Florestal e Industrial, Lda Mozambique 25.00 75.00 100.00 Portucel Florestal Brasil - Gestão de Participações, Ltda Brazil 25.00 75.00 100.00 PortucelSoporcel Logistica de Papel, ACE Figueira da Foz 33.33 66.67 100.00 PortucelSoporcel Abastecimento de Madeira, ACE Setúbal 60.00 40.00 100.00
Consolidated Annual Report 2011 126 Translation of a report originally issued in Portuguese – Note 42
40. Companies excluded from the consolidation
Percentage of capital held by Group companies Company Head office Directly Indirectly Total
Tecnipapel – Sociedade de Transformação e Distribuição de Papel, Lda Setúbal 56.00 44.00 100.00 PortucelSoporcel Papel - Sales e Marketing, ACE Figueira da Foz 50.00 50.00 100.00 Naturfungi, ACE Setúbal - 50.00 50.00
These entities were liquidated during the year ended 31 December 2011.
41. Subsequent Events
41.1. Acquisition of tresaury shares
Through a number of stock market operations in January 2012, Portucel acquired several lots of treasury shares, totaling 11,450 titles, amounting to Euro 20,503.
Following these acquisitions, Portucel now holds directly and indirectly through its subsidiaries, 22,111,382 shares representing 2.881% of its share capital.
42. Note added for translation
The accompanying financial statements are a translation of financial statements originally issued in Portuguese. In the event of any discrepancies the Portuguese version prevails.
BOARD OF DIRECTORS
Pedro Mendonça de Queiroz Pereira Chairman
José Alfredo de Almeida Honório
Manuel Soares Ferreira Regalado
Adriano Augusto da Silva Silveira
António José Pereira Redondo
José Fernando Morais Carreira de Araújo
Luis Alberto Caldeira Deslandes
Manuel Maria Pimenta Gil Mata
Francisco José Melo e Castro Guedes
José Miguel Pereira Gens Paredes
Paulo Miguel Garces Ventura
Consolidated Annual Report 2011 127
Statutory Auditors Report in respect of the Consolidated Financial Information
(Free translation from the original version in Portuguese)
Introduction
1 As required by law, we present the Statutory Auditors Report in respect of the Consolidated Financial Information included in the consolidated Board of Directors’ Report and the consolidated financial statements of Portucel – Empresa Produtora de Pasta e Papel, S.A., comprising the consolidated statement of financial position as at 31 December 2011, (which shows total assets of Euro 2,821,251,978, and a total shareholder's equity of Euro 1,478,155,508 including non- controlling interest of Euro 220,660 and a net profit of Euro 196,331,389), the consolidated separate income statement, the statement of comprehensive consolidated income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended and the corresponding notes to the accounts.
Responsibilities
2 It is the responsibility of the Company’s Board of Directors (i) to prepare the consolidated Directors’ Report and consolidated financial statements which present fairly, in all material respects, the financial position of the company and its subsidiaries, the consolidated changes in equity, the consolidated result of their operations and their consolidated cash flows; (ii) to prepare historic financial information in accordance with International Financial Reporting Standards as adopted by the EU and which is complete, true, timely, clear, objective and licit, as required by the Portuguese Securities Market Code; (iii) to adopt adequate accounting policies and criteria; (iv) to maintain appropriate systems of internal control; and (v) to disclose any relevant matters which have influenced the activity, the financial position or results of the company and its subsidiaries.
3 Our responsibility is to verify the consolidated financial information included in the documents referred to above, namely if it is complete, true, timely, clear, objective and licit, as required by the Portuguese Securities Market Code, and to issue an independent and professional report based on our audit.
Scope
4 We conducted our audit in accordance with the Standards and Technical Recommendations approved by the Institute of Statutory Auditors which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Accordingly, our audit included: (i) verification that the subsidiary’s financial statements have been properly examined and for the cases where such an audit was not carried out, verification, on a sample basis, of the evidence supporting the amounts and disclosures in the consolidated financial statements, and assessing the reasonableness of the estimates, based on the judgements and criteria of Management used in the preparation of the consolidated financial statements; (ii) verification of the consolidation operations, and, when applicable, the utilization of the equity method; (iii) assessing the appropriateness and consistency of the accounting principles
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used and their disclosure, as applicable; (iv) assessing the applicability of the going concern basis of accounting; (v) assessing the overall presentation of the consolidated financial statements; and (vi) assessing whether the consolidated financial information is complete, true, timely, clear, objective and licit.
5 Our audit also covered the verification that the information included in the consolidated Directors’ Report is in agreement with the other documents as well as the verification set forth in paragraphs 4 and 5 of Article 451 of the Companies Code.
6 We believe that our audit provides a reasonable basis for our opinion.
Opinion
7 In our opinion, the consolidated financial statements referred to above, present fairly in all material respects, the consolidated financial position of Portucel – Empresa Produtora de Pasta e Papel, S.A. as at 31 December 2011, the consolidated results of their operations and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and the information included is complete, true, timely, clear, objective and licit.
Report on other legal requirements
8 It is also our opinion that the information included in the Directors’ Report is in agreement with the financial statements for the year and that the Corporate Governance Report includes the information required under Article 245-A of the Portuguese Securities Code.
Lisbon, 28 February 2012
PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda. Represented by:
António Alberto Henriques Assis, R.O.C.
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PORTUCEL – Empresa Produtora de Pasta e Papel, SA
Report and Opinion of the Audit Board Consolidated Accounts
Financial year of 2011
Shareholders,
1. In accordance with the law, the articles of association and the terms of our mandate, we are pleased to submit the report on our supervisory activities in 2011 and to issue our opinion on the Consolidated Management Report and Consolidated Financial Statements presented by the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, SA, for the financial year ended 31 December 2011.
2. Over the course of the year we monitored the affairs of the company and its most significant affiliates and associates, with the regularity and to the extent we deemed appropriate, through periodic meetings with the company’s directors and senior management. We checked that the accounts were kept correctly and duly documented, and verified the effectiveness of the risks management, internal control and internal audit systems. We also monitored compliance with the law and the articles of association. We encountered no constraints in the course of our supervisory activities.
3. We met several times with the official auditor and external auditor, PricewaterhouseCoopers & Associados, SROC, Lda, monitoring its auditing activities and checking its independence. We assessed the Legal Accounts Certificate and the Audit Report, and are in agreement with the Legal Accounts Certificate presented.
4. In the course of our work we found that:
a) the Consolidated Income Statement, the Consolidated Statement of Recognized Income and Expense, the Statement of Changes in Consolidated Equity and the Consolidated Statement of Cash Flows and the corresponding Notes provide an adequate picture of the state of the company’s affairs and its profits;
b) the accounting policies and valuation criteria adopted comply with the International Financial Reporting Standards (IFRS) as adopted in the European Union and suitably assure that such criteria lead to a correct valuation of the company’s assets and profits, taking due account of the analyses and recommendations of the external auditor;
c) the Consolidated Management Report provides a sufficient description of the business affairs of the company and its affiliates included in the consolidated accounts, offering a clear account of the most significant developments during the year.
d) the Corporate Governance Report includes the information required by Article 245-A of the Securities Code.
5. Accordingly, taking into consideration the information received from the Board of Directors and the company departments, and also the conclusions of the Legal Accounts Certificate and the Audit Report, we recommend that:
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a) the Consolidated Management Report be approved;
b) the Consolidated Financial Statements be approved;
6. Finally, the members of the Audit Board wish to acknowledge and express their thanks for the assistance received from the Board of Directors, the senior managers of the company and other staff.
Lisbon, 29 February 2012
The Chairman of the Audit Board
Miguel Camargo de Sousa Eiró
Member
Duarte Nuno d’Orey da Cunha
Member
Gonçalo Nuno Palha Gaio Picão Caldeira
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Corporate Governance Report
Chapter 0 Declaration of compliance
0.1. Location where the public may find the Corporate Governance Codes to which the issuer is subject to or those which the issuer voluntarily abides by.
The Company follows the Corporate Governance Code for Listed Corporations of the CMVM (the Portuguese Securities Market Commission), by applying CMVM Regulation no. 1/2010. The Recommendations and the Regulation can be consulted at the CMVM website at www.cmvm.pt.
0.2. Detailed description of the recommendations contained in the CMVM Corporate Governance Code or any other code that have or have not been adopted, in accordance with CMVM Regulation 1/2010. Recommendations not fully adopted are regarded for present purposes as not adopted.
Recommendations COMPLIANCE REMARKS
I. General Meeting I.1 Officers of the General Meeting I.1.1 The Chairman of the General Meeting shall have at his disposal the necessary and adequate human Adopted See Chapter I resources and logistic support, taking the financial Item 1.1 position of the company into consideration. I.1.2 The remuneration of the Chairman of the General Meeting shall be disclosed in the annual report on Adopted See Chapter I corporate governance. Item 1.3
I.2 Participation at the Meeting I.2.1 The deadline for submitting proof of the deposit or blocking of shares for the purposes of attending general Adopted See Chapter I meetings shall be no more than five business days prior Item 1.4 to the date of the meeting. I.2.2 In the event of the General Meeting being adjourned, the company shall not require shares to be Adopted See Chapter I blocked until the meeting is resumed, when the normal Item 1.5 requirement for the first session shall again apply.
I.3 Voting and Exercise of Voting Rights I.3.1 The articles of association shall not impose any Adopted See Chapter I restriction on postal voting or, whenever adopted or Item 1.7 admissible, on electronic voting. I.3.2 The deadline established in the articles of association for receiving postal ballots shall be no more Adopted See Chapter I than 3 business days prior to the date of the meeting. Item 1.11 I.3.3 Companies shall ensure that voting rights are proportional to shareholder’s holdings, preferably by Adopted See Chapter I
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enshrining the one share-one vote principle in the Item 1.6 articles of association. Companies are deemed not to comply with the requirement of proportionality when: i) they have non-voting shares; ii) have shares for which the respective voting rights are not counted if in excess of a given number, when cast by a single shareholder or related shareholders.
I.4 QUORUM FOR RESOLUTIONS I.4.1 Companies shall not set a quorum for adopting Adopted See Chapter I.8 resolutions greater than that established in law.
I.5 MINUTES AND INFORMATION ON RESOLUTIONS PASSED I.5.1 An extract from the minutes of the General See Chapter I Meetings shall be posted or their contents otherwise Adopted Items 1.13 and 1.14 made available to shareholders through the company’s website, within five days of the holding of the general meeting, irrespective of whether constituting privileged information. The information disclosed shall include the resolutions adopted, the share capital represented and the results of votes. This information shall be kept on the company’s website for no less than three years.
I.6 MEASURES ON CORPORATE CONTROL I.6.1 Measures aimed at preventing successful takeover bids, shall respect both the company’s and the Adopted See Chapter I shareholders’ interests. Item 1.19
When, in keeping with this principle, the articles of association of a company set a limit on the number of votes which may be held or exercised by a single shareholder, individually or in conjunction with other shareholders, they shall also provide that, no less than every five years, a motion for maintaining or altering this provision shall be put before the general meeting (without requiring a quorum greater than that provided for in law) and that all votes cast in relation to such resolution shall be counted, without operation of the restriction in question. I.6.2 In cases such as change of control or changes to the composition of the Board of Directors, defensive Adopted See Chapter I measures shall not be adopted that instigate immediate Item 1.20 and serious erosion of the company’s assets, thereby disrupting the free transferability of shares and free assessment of the performance of the Board of Directors by the shareholders. II. MANAGEMENT AND AUDIT BOARD II.1. GENERAL ISSUES II.1.1. STRUCTURE AND DUTIES II.1.1.1 The Board of Directors shall assess the model adopted in its annual corporate governance report and Adopted See Chapter II identify any constraints on its functioning and shall Item 2.4 propose measures that it considers appropriate for overcoming such constraints. II.1.1.2 Companies shall set up internal risk control and management systems in order to safeguard their value Adopted See Chapter II and for the sake of transparency in their corporate Item 2.5 governance, allowing it to identify and manage risk.
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These systems shall include at least the following components: i) setting of strategic company objectives with regard to risk acceptance; ii) identification of the main risks associated with the specific business carried on and of the events which may give rise to risks; iii) analysis and measurement of the impact and probability of the occurrence of each of the potential risks; iv) risk management with a view to aligning the risks effectively incurred with the company’s strategic options regarding risk assessment; v) procedures for monitoring execution of risk management measures adopted and their effectiveness; vi) adoption of internal reporting and information procedures relating to the different components of the system and risk alerts; vii) periodic assessment of the system implemented and adoption of changes as required. II.1.1.3 The Board of Directors shall ensure that internal Adopted See Chapter II control and risk management systems are set up and Item 2.5 function. The Supervisory Board shall be responsible for assessing the functioning of these systems and proposing any changes required to adjust them to the company’s needs. II.1.1.4 In their annual corporate governance reports, Adopted See Chapter II companies shall: i) identify the main economic, financial Item 2.9 and legal risks to which the company is exposed in carrying on its business; ii) describe the activities and effectiveness of the risk management system. II.1.1.5 The Management and Audit Boards shall establish internal regulations which shall be disclosed Adopted See Chapter II on its website. Item 2.7
II.1.2 INCOMPATIBILITY AND INDEPENDENCE II.1.2.1 The Board of Directors shall include a number of See Chapter II non-executive members that assures effective capacity Adopted Item 2.1 to oversee, audit and assess the activities of the executive members. II.1.2.2 Non-executive members shall include an adequate number of independent members. The size of Not adopted See Chapter 0.4 the company and its shareholder structure shall be taken into account when setting this number, which shall never be less than a quarter of the total number of directors. II.1.2.3 The assessment by the board of directors of the independence of its members shall take into account the legal and regulatory rules in force concerning Adopted See Chapter II independence requirements and the rules on Items 2.14 e 2.15 incompatibility applicable to members of other company bodies, so that independence criteria are applied systematically and coherently across the entire company, including over time. A director shall not be deemed independent if, on any other corporate board of body, he or she would not qualify as independent under the applicable rules.
II.1.3 ELIGIBILITY AND APPOINTMENT II.1.3.1 Depending on the applicable model, the Chairman of the Audit Board, the Audit Committee or Adopted Chapter II the Financial Affairs Committees shall be independent Item 2.21 and be adequately capable of performing his duties.
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II.1.3.2 The selection process for applicants for non- executive directorships shall be designed so as to Adopted Chapter II prevent interference from executive directors. Item 2.16 II.1.4 POLICY ON WHISTLEBLOWING II.1.4.1 The company shall adopt a policy whereby alleged irregularities occurring within the company are Adopted Chapter II reported, specifying: i) the means through which such Item 2.35 irregularities may be reported internally, including the persons that are entitled to receive the reports; ii) how the report is to be handled, including confidential treatment, should it be required by the reporter. II.1.4.2 The general guidelines on this policy shall be disclosed in the corporate governance report. Adopted Chapter II Item 2.35
II.1.5 REMUNERATION II.1.5.1 The remuneration of the members of the Board of Directors shall be structured so as to align their Not adopted This recommendation is only not interests with the long term interests of the company, adopted with regard to the 2nd part shall be based on performance assessments and of sub-paragraph ii) and the 1st part discourage excessive risk taking. To this end, of sub-paragraph iii); sub- remuneration shall be structured, namely, as follows: paragraphs v) and vi) are not applicable. i) the remuneration of directors with executive duties shall include a variable component, set See Chapter 0.4 in accordance with the performance assessment, conducted by the competent company bodies, in accordance with measurable and pre-set criteria, which consider the real growth of the company and the wealth effectively created for shareholders, its long term sustainability and the risks accepted, and also compliance with the rules applicable to the company’s business operations. ii) The variable component of remuneration shall be reasonable overall in relation to the fixed remuneration component, and upper limits shall be set for all components; iii) A significant part of the variable remuneration shall be deferred for a period of no less than three years, and payment of such part shall depend on the continued positive performance of the company over this period. iv) Members of the board of directors shall not enter into contracts either with the company or with third parties which have the effect of mitigating the risk inherent in the variability of their remuneration as fixed by the company. v) Until the end of their term of office, executive directors shall maintain the shares in the company which they may have received under variable pay schemes, up to a limit of twice the value of their total annual remuneration, save those which have to be disposed of in order to pay taxes resulting from the earnings of these shares. vi) When the variable remuneration includes the allocation of options, the start of the period for
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exercise shall be deferred for a period of no less than three years. vii) Appropriate legal instruments shall be instituted so that the severance pay established for any form of dismissal without due cause or termination of directorship is not paid if the dismissal or termination by agreement is due to failings in the director’s performance. viii) The remuneration of non-executive directors shall not include any component dependent on their performance or the value of the company. II.1.5.2 The statement on remuneration policy for Adopted See Chapter II members of the board of directors and audit board Item 2.30 referred to in Article 2 of Law 28/2009, of 19 July, shall contain, in addition to the content referred to therein, sufficient information: i) on which corporate groups were selected for comparison of remuneration policy and practices for the purposes of setting remuneration; ii) on severance payments for directors. II.1.5.3 The remuneration policy statement referred to in Article 2 of Law 28/2009 should also encompass the Not adopted See Chapter 0.4 remuneration of management personnel, as defined in Article 248-B.3 of the Securities Code, whose remuneration includes a significant variable component. The statement should be detailed and the policy presented should take into account the company’s long term performance, compliance with the rules applicable to the company’s operations and restraint in risk-taking. II.1.5.4 A proposal shall be submitted at the General Meeting on the approval of plans for the allotment of Not applicable See Chapter 1.18 shares and/or share options or options based on variations in share prices, to members of the Management and Audit Boards and other management personnel as defined in Article 248/3/B of the Securities Code. The proposal shall mention all the necessary information for a correct assessment of any such plan. The proposal shall contain the plan regulations or, if these have not yet been drawn up, the general conditions to which the plan is subject. The main features of the retirement benefit plans for members of the Management and Audit Boards and other management personnel, as defined in Article 248/3/B of the Securities Code, shall also be approved at the General Meeting. II.1.5.6 No less than one representative of the Remuneration Committee shall be present at the Annual Adopted See Chapter I Shareholders’ General Meeting. Item 1.15 II.1.5.7 The annual report shall disclose, in aggregate and individual terms, the remuneration received in other Adopted See Chapter II group companies and pensions rights acquired through Item 2.31 such office.
II.2. BOARD OF DIRECTORS II.2.1 Within the limits established by Law for each Management and Supervisory structure, and except on Adopted See Chapter II the grounds of the small size of the company, the Board Item 2.3 of Directors shall delegate the day-to-day running of the company and the delegated responsibilities shall be
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identified in the Annual Report on Corporate Governance. II.2.2 The Board of Directors shall ensure that the company acts in accordance with its objects, and shall Adopted See Chapter II not delegate its responsibilities with regard to: i) Item 2.3 definition of the company’s strategy and general policies; ii) definition of the corporate structure of the group; iii) decisions that should be considered as strategic due to the amounts, risk and particular characteristics involved. II.2.3 If Chairman of the Board of Directors exercises executive duties, the Board of Directors shall set up Not applicable efficient procedures for coordinating non-executive members that assure that these may reach decisions in an independent and informed manner, and furthermore shall provide shareholders with details of these procedures in the corporate governance report. II.2.4 The annual management report shall include a description of the work of non-executive Board Adopted See Chapter II Members and shall mention any constraints Item 2.3 encountered. and Annex II II.2.5. The company shall specify its policy on rotating areas of responsibility within the board of directors, and in particular responsibility for financial matters, providing information on this in its annual corporate governance Adopted See Chapter II report. Item 2.11
II.3 CHIEF EXECUTIVE OFFICER (CEO), EXECUTIVE COMMITTEE AND EXECUTIVE BOARD OF DIRECTORS II.3.1 Directors who exercise executive duties, when requested by other Board Members to supply Adopted See Chapter II information, shall do so in good time and the information Item 2.3 supplied shall adequately respond to the enquiry. II.3.2 The Chairman of the Executive Committee shall send notices and minutes of meetings to the Chairman Adopted See Chapter II of the Board of the Directors and, when applicable, to Item 2.3 the Chairman of the Audit Board or the Auditing Committee. II.3.3 The Chairman of the Executive Board of Directors shall send the notices and minutes of meetings to the Not applicable Chairman of the General and Audit Board and to the Chairman of the Financial Affairs Committee.
II.4. GENERAL AND AUDIT BOARD, FINANCIAL AFFAIRS COMMITTEE, AUDIT COMMITTEE AND AUDIT BOARD II.4.1 In addition to its supervisory duties, the General and Audit Board shall advise, monitor and assess, on an Not applicable ongoing basis, the management of the company by the Executive Board of Directors. In addition to other matters, the General and Audit Board shall pronounce on: i) definition of the strategy and general policies of the company; ii) the corporate structure of the group; and iii) decisions which should be considered strategic due to the amounts, risk and particular characteristics involved. II.4.2 The annual reports and financial information on the work of the General and Supervisory Committee, the Adopted See Chapter II
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Financial Affairs Committee, the Audit Committee and Item 2.23 the Audit Board shall be disclosed on the company’s and website together with the financial statements. Annex III II.4.3 The annual reports on the work of the General and Audit Board, the Financial Affairs Committee, the Audit Adopted See Annex III Committee and the Audit Board shall include a description of their supervisory activity and shall mention any constraints encountered. II.4.4 The General Supervisory Board, the Audit Committee and the Audit Board (depending on the Not adopted See Chapter0.4 applicable model) shall represent the company for all See Chapter II purposes in dealings with the external auditor, and shall Section III propose the provider of these services and the Item 2.24 respective remuneration, ensure that adequate conditions for the supply of these services are in place within the company, as well as providing the point of contact at the company and receiving the respective reports. II.4.5 Depending on the applicable model, the Audit Committee and the Audit Board shall assess the Adopted See Chapter II external auditor annually and propose his dismissal to Section III the General Meeting whenever there is due cause. Item 2.24 See Annex III II.4.6 The internal audit departments and those that ensure compliance with the rules applicable to the Not adopted See Chapter 0.4 company (compliance services) shall report to the Audit Committee, the General and Supervisory Board or in the case of companies adopting the Latin model, an independent director or Supervisory Board, regardless of the hierarchical relationship that these services have with the executive management of the company. II.5. SPECIAL COMMITTEES II.5.1 Except in small companies and depending on the model adopted, the Board of Directors and the General Adopted See Chapter II and Supervisory Committees shall set up the necessary Item 2.30 Committees in order to: i) assure competent and independent assessment of the performance of the Executive Directors, as well as of their own overall performance and also that of all existing Committees; ii) reflect on the governance system in place and monitor its effectiveness and propose to the relevant bodies the measures required to improve it; III) identify promptly potential candidates with the high profile needed to hold the office of director. II.5.2 Members of the Remuneration Committee or the equivalent shall be independent of the Members of the Adopted See Chapter II Board of Directors and include no less than one Item 2.30 member with knowledge and experience in the field of Annex IV remuneration policy. II.5.3 No natural or legal person who provides, or has provided in the last three years, services to any body or Adopted See Chapter II organization reporting to the board of directors or to the Item 2.30 company’s board of directors itself, or who has any Annex IV current relationship with the company’s consultants, shall be contracted to support the Remuneration Committee in the performance of its duties. This recommendation also applies to any natural or legal person connected with such persons by employment or service contract.
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II.5.4 All Committees shall draw up minutes of the Adopted See Chapter II meetings held. Item 2.30
III. REPORTING AND AUDITING III.1 GENERAL REPORTING DUTIES III.1.1 Companies shall maintain permanent contact with the market, thereby upholding the principle of equality Adopted See Chapter III for shareholders and preventing any inequality in access Item 3.15 to information for investors. To this end, the company shall have an investor support office. III.1.2 The following information published on the company’s website shall be disclosed in the English Adopted See Chapter III language: Item 3.15 1. The company name, public company status, registered office and other data required by Article 171 of the Companies Code; 2. Articles of association; 3. Identity of company officers and market relations officer; 4. Investor support office, respective services and contact details; 5. Financial statements and reports; 6. Six-monthly schedule of company events; 7. Motions to be tabled at the General Meeting; 8. Notices of general meetings. III.1.3 Companies shall change to a new auditor after two or three terms of office, depending on whether such Adopted See Chapter II terms are respectively of three or four years. Section III Reappointment after such period has elapsed shall be Item 2.24 on the basis of grounds set out in a specific report from the supervisory board, expressly assessing the auditor’s independence and the advantages and costs of substitution III.1.4. In the exercise of its duties, the external auditor shall check the application of remuneration policies and Adopted See Chapter III systems, the effectiveness and workings of internal Item III.13 control procedures and report any shortcomings to the company’s supervisory board. III.1.5. The company shall not contract from the external auditor, or from any entities belonging to the same Adopted See Chapter III corporate group or network, any services other than Item III.13 audit services. If there are reasons for contracting such services, which shall be approved by the supervisory board and detailed in its annual corporate governance report, they shall not account for more than 30% of the total value of the services supplied to the company.
IV. CONFLICTS OF INTERESTS IV.1. DEALINGS WITH SHAREHOLDERS IV.1. Transactions between the company and the owners of qualifying holding, or with entities in any way Adopted See Chapter III related to such shareholders, as defined in Article 20 of Item III.13 the Securities Code, shall be carried out on an arm’s length basis.
IV.1.2. Significant transactions with the owners of qualifying holdings, or with entities in any way related to Adopted See Chapter III such shareholders, as defined in Article 20 of the Item III.13 Securities Code, shall be submitted for prior clearance
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by the supervisory board. This body shall determine the procedures and criteria needed for assessing whether such transactions are significant and for deciding on any steps to be taken. 0.3. Notwithstanding the foregoing, the company may also make an overall assessment, provided due grounds are stated, of the degree of adoption of groups of thematically related recommendations
In its overall assessment of the degree of adoption of the recommendations, the Company has established that this degree is fairly high, whilst still acknowledging that a number of differences exist, as detailed in the relevant chapters. Attention is drawn to the reduction in the number of recommendations not adopted, down from seven to five, as described below.
In relation to the recommendations applicable to the constitution and workings of the General Meeting, the Company has adopted the recommendations in full.
With regard to the recommendations applicable to the management and supervisory bodies, the Company can report an improvement in the degree of adoption in relation to the previous year, as the number of recommendations not adopted has fallen from six to five. The recommendation on the disclosure of the rules of procedure of the management and supervisory bodies was adopted with the publication of these rules, in 2011, on the Group website.
In relation to the recommendation not adopted with regard to the composition of the Board of Directors and the policy on directors’ remuneration, these are matters for which sole powers lie with the shareholders or the Remuneration Committee, which is elected directly by the General Meeting. The reason for non-adoption of the recommendation on the statement of remuneration policy for management personnel has to do with natural commercial concerns and others relating to competition. In relation to the recommendation on representation of the Company in dealings with the External Auditor, although the letter of the recommendation has not been adopted, the Company is satisfied that it has fully complied with its underlying spirit, as we shall see below.
Finally, with regard to general duties of information, the Company has now adopted the recommendation on the presentation of all motions to the General Meeting in English, having published the relevant documents on its website in English in the motions tabled at the General Meeting of 19 May 2011.
Accordingly, with only five recommendations not adopted, the Company considers that its degree of compliance is fairly high and that significant progress has been made on the degree of adoption of the CMVM recommendations over recent periods.
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0.4. When the structure or the corporate governance practices deviate from the CMVM’s Recommendations or from other Corporate Governance Codes to which the company is subject or which it has voluntarily applied, the company shall explain which parts of each code have not been complied with and the reasons for this.
II.1.2.2 Non-executive members shall include an adequate number of independent members. The size of the company and its shareholder structure shall be taken into account when setting this number, which shall never be less than a quarter of the total number of directors.
In accordance with the independence criterion defined in Article 414.5 of the Companies Code, the non- executive members of the Portucel’s Board of Directors cannot be considered independent. However, it is our view that the legal criteria are purely formal, and that the experience, track record and proven abilities of the Company’s non-executive directors has permitted them to perform their duties with complete independence.
II.1.5.1 The remuneration of the members of the Board of Directors shall be structured so as to align their interests with the long term interests of the company, shall be based on performance assessments and discourage excessive risk taking. To this end, remuneration shall be structured, namely, as follows:
i) the remuneration of directors with executive duties shall include a variable component, set in accordance with the performance assessment, conducted by the competent company bodies, in accordance with measurable and pre-set criteria, which consider the real growth of the company and the wealth effectively created for shareholders, its long term sustainability and the risks accepted, and also compliance with the rules applicable to the company’s business operations. ii) The variable component of remuneration shall be reasonable overall in relation to the fixed remuneration component, and upper limits shall be set for all components; iii) A significant part of the variable remuneration shall be deferred for a period of no less than three years, and payment of such part shall depend on the continued positive performance of the company over this period. iv) Members of the board of directors shall not enter into contracts either with the company or with third parties which have the effect of mitigating the risk inherent in the variability of their remuneration as fixed by the company. v) Until the end of their term of office, executive directors shall maintain the shares in the company which they may have received under variable pay schemes, up to a limit of twice the value of their total annual remuneration, save those which have to be disposed of in order to pay taxes resulting from the earnings of these shares. vi) When the variable remuneration includes the allocation of options, the start of the period for exercise shall be deferred for a period of no less than three years. vii) Appropriate legal instruments shall be instituted so that the severance pay established for any form of dismissal without due cause or termination of directorship is not paid if the dismissal or termination by agreement is due to failings in the director’s performance. viii) The remuneration of non-executive directors shall not include any component dependent on their performance or the value of the company.
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The Remuneration Committee is the body responsible for defining the criteria for directors’ pay and which each year submits for the shareholders’ approval, at the general meeting, the criteria for setting this remuneration, which may not necessarily coincide with the limits and procedures described in the items above.
Of the eight sub-paragraphs in this recommendation, the Company fails only to comply with the 2nd part of sub- paragraph ii) and the 1st part of sub-paragraph iii), given that sub-paragraphs v) and vi) are not applicable.
In relation to sub-paragraph ii), it is our view that the criterion embodied by the word “reasonable” is subjective and difficult to define; however, from the Company’s perspective, the remuneration paid is entirely reasonable in view of the directors’ performance and the results achieved. Although the Company’s articles of association set no cap on remuneration, this is not to say that the Remuneration Committee does not carry out an extremely strict appraisal when setting the specific value of remuneration.
On the question of deferral of a significant portion of the variable remuneration, the Company considers that given the stability of both the shareholder structure and the board of directors, it makes sense not to apply this recommendation in the Company’s current circumstances given that it would not be possible to make opportunistic use of the directors’ performance in the light of the profits for the period, as may be seen from the profits recovered over recent years and the close connection between these profits and directors’ pay.
With regard to sub-paragraph viii), we consider that, although the non-executive directors receive variable remuneration, the Company still complies with this fact given that this variable remuneration is completely unconnected to the Company’s performance, and is instead directly tied to responsibilities exercised and contributions on matters regarded as relating to strategic development for the Company and its associated group.
II.1.5.3 The remuneration policy statement referred to in Article 2 of Law 28/2009 should also encompass the remuneration of management personnel, as defined in Article 248-B.3 of the Securities Code, whose remuneration includes a significant variable component. The statement should be detailed and the policy presented should take into account the company’s long term performance, compliance with the rules applicable to the company’s operations and restraint in risk-taking.
The remuneration policy statement drawn up by the Remuneration Committee does not include the remuneration of management personnel, as defined in Article 248-B.3 of the Securities Code, as this is a matter not assessed by the General Meeting, insofar as it is understood to be a matter on which the directors have sole powers, and in view of the negligible amounts involved in relation to the company’s total assets.
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It should also be remembered that that the Company faces fierce competition at home and abroad, which causes it to have understandable reservations about disclosing remuneration or the remuneration policies for management personnel.
II.4.4I - The General Supervisory Board, the Audit Committee and the Audit Board (depending on the applicable model) shall represent the company for all purposes in dealings with the external auditor, and shall propose the provider of these services and the respective remuneration, ensure that adequate conditions for the supply of these services are in place within the company, as well as providing the point of contact at the company and receiving the respective reports.
The letter of this recommendation has not been adopted but the company complies with its spirit.
The company considers in the first place that the recommendation should not be interpreted as meaning that formal powers to represent the company in this regard should be granted to the audit board, by powers of attorney or other equivalent instruments.
The Audit Board effectively is a prime point of contact with the External Auditor, and its reports are generally received and discussed at joint meetings with the Audit Board and a member of the Board of Directors; the Audit Board assures that proper arrangements have been made within the company for the audit services to be conducted correctly.
But the letter of the recommendation goes further, asserting that the Audit Board should be “the” point of contact between the company and the external auditor, and also requiring that instead of the report being received simultaneously it should instead be submitted in the first place to the Audit Board. This appears excessive. The company takes the sufficient steps to assure there are no barriers or filters between the external auditor and the Audit Board which would deny the Audit Board direct knowledge of the auditor’s work; the Board of Directors takes the necessary steps to assure the reports are submitted simultaneously to the Audit Board and itself, but it cannot in all conscience deny itself knowledge of the findings of the external auditors, or delay the moment when it learns of such findings. Ultimate responsibility for the company’s affairs and its financial statements lies with the Board of Directors.
As regards the contracting of the external auditor, the Audit Board proposes the auditor under the terms of Article 420.2 b) of the Companies Code and is party to the process of fixing the respective remuneration and the remuneration for the additional services it provides. It should be noted that the External Auditor is the company’s Official Auditor and has been elected by the shareholders for a term of office identical to that of the Audit Board.
In other words, as stated above, the concerns which prompted this recommendation have been taken into due account by Portucel, but the literal text of the recommendation has not been adopted.
Consolidated Annual Report 2011 143
II.4.6 The internal audit departments and those that ensure compliance with the rules applicable to the company (compliance services) shall report to the Audit Committee, the General and Supervisory Board or in the case of companies adopting the Latin model, an independent director or Supervisory Board, regardless of the hierarchical relationship that these services have with the executive management of the company.
As may be seen in the organizational chart contained in chapter II of this Report, the internal audit services report directly to the Chairman of the Executive Board. However, irrespective of this direct relationship, the internal audit service meets directly with the Audit Board when requested, providing all information which the Audit Board deems relevant.
Consolidated Annual Report 2011 144
Chapter I
General Meeting
1.1. Identification of the officers of the General Meeting:
The Chairman of the General Meeting elected for the four-year period 2011-2014 was Dr. José Pedro Aguiar Branco, who however tendered his resignation from this office on 21 June 2011. The office is currently vacant, awaiting the election of a new Chairman at the Company’s next General Meeting.
The duties of secretary to the General Meeting are exercised by Dra. Rita Maria Pinheiro Ferreira.
The Company provides the chairman of the General Meeting with the human and logistical resources required, through the supporting services of the Company Secretary and the Legal Office; this support is deemed appropriate in view of the size and state of the company’s affairs, as well as the usual participation in General Meetings.
The Investor Relations Office also provides support with regard to the general meeting, replying to enquiries from shareholders and organizing accreditation for participation in the meetings, liaising with the Company Secretary and the officers of the General Meeting.
1.2. Starting and ending dates of terms of office:
The officers of the General Meeting were elected for a term of office starting on 01/01/2011 and ending on 31/12/2014.
1.3. Remuneration of the chairman of the General Meeting.
During 2011, the remuneration earned by the Chairman of the General Meeting was 3.000€.
1.4. Time during which shares must be blocked in order for their holders to participate in the general meeting.
Consolidated Annual Report 2011 145
The articles of association require shareholders to present to the Company documentary evidence of ownership of shares no less than five days prior to the date of the meeting, as required by Article 23-C.1 of the Securities Code.
1.5. Rules applicable to the blocking of shares in the event of adjournment of the General Meeting.
In the event of the meeting being adjourned, the Company need not require shares to be frozen until the meeting is resumed, the normal rule for the first session again applying, in other words, shareholders are required to provide evidence of ownership of shares by the fifth day prior to the resumption of the meeting.
1.6. Number of shares that correspond to one vote.
One vote corresponds to each 1,000 shares in the company.
The Company considers that the principle of proportionality between voting rights and shareholder investment is respected. Voting rights are in fact dependent on the holding of a minimum number of shares, in a Company where the Articles of Association do not provide for a cap on the number of votes counted from each shareholder and in which there are no non-voting shares.
1.7. Existence of provision in the articles of association for non-voting shares or rules establishing that votes in excess of a given number are not counted, when cast by a single shareholder or related shareholders.
There are no provisions to this effect in the Articles of Association.
1.8. The existence of rules in the articles of association on the exercise of voting rights, including quorums for holding meetings or adopting resolutions or systems for equity rights.
The Company’s Articles of Association contain no specific rules on a quorum for adoption of resolutions by the General meeting, meaning that the legal rules established in the Companies Code apply in full.
Consolidated Annual Report 2011 146
1.9. Existence of rules in the articles of association on postal votes.
There are no rules in the articles of association on the casting of postal votes, and the procedures for exercising this right are explained in the notice of the General Meeting.
Accordingly, shareholders who wish to cast postal votes are required to send a letter to the Chairman of the General meeting, at the company’s registered offices, containing a closed envelope for each item on the order of business on which they wish to vote, indicating on each envelope that it contains a postal vote, and specifying the General Meeting and the item on the order of business to which it refers; inside each envelope, the shareholder is required to declare his vote, namely by taking a position in relation to any motions submitted in advance to the General Meeting; each voting declaration must be signed, and the signature notarized or authenticated by legal means deemed to be equivalent.
Postal votes are only considered if the shareholders casting them provide evidence of the ownership of their shares, in accordance with the general rules.
Postal votes are only considered when received by the day prior to the holding of the meeting, inclusive.
1.10. Provision of postal voting forms.
The company provides postal voting forms. These forms are available on the company’s website and may be requested from the investor support office.
1.11. Time limit for receipt of postal ballots prior to the date of General Meetings.
Postal ballots will be received up to the day prior to the date of the General Meeting.
1.12. Exercise of voting rights by electronic means.
Exercise of voting rights by electronic means is still not possible. We wish to note that the company has yet to receive any enquiry or expression of interest from shareholders or investors in relation to such a facility.
1.13. Shareholder access to extracts from minutes of general meetings through company website within five days of the holding of the meeting
Consolidated Annual Report 2011 147
Extracts from the minutes of General Meetings are posted on the Company’s website, www.portucelsoporcel.com in the investor relations area, within five days of the holding of the General Meeting.
1.14. Existence of historical archives, on the company’s website, with resolutions adopted at the company’s general meetings, the share capital represented and the results of votes, for the last three years.
In addition to the minutes of General Meetings, the Company’s website also provides shareholders with information on the list of attendees at meetings, the order of business and resolutions adopted, in respect of all general meetings held in the last three years.
1.15. Information on presence at general meetings of representative(s) of the remuneration committee.
The presence of the members of the Remuneration Committee is always required at General meetings. The minutes of General Meetings always indicate how the committee was represented, and in the last three years it was represented by Frederico José da Cunha Mendonça e Meneses at the General Meetings of 19 May 2011, 17 December 2010 and 15 March 2010, by José Gonçalo Maury, João Rodrigo Appleton Moreira Rato and Frederico José da Cunha Mendonça e Meneses at the General Meetings of 6 March 2009.
1.16. Information on the intervention by the General Meeting on matters concerning the remuneration policy of the company and assessment of the performance of members of the Board of Directors.
The remuneration policy for company officers is the responsibility of the Remuneration Committee, which submits its proposals for the approval of the General Meeting, which is attended by at least one member of the Remuneration Committee. The remuneration policy submitted to the General Meeting in 2012 is set out in Annex IV to this report.
1.17. Information on the general meeting’s intervention concerning proposals for share- or option-based payment schemes or payment schemes based on variations in share prices for members of the board of directors, audit board or other management personnel, as defined in Article 258-B.3 of the Securities Code, and on the documents made available to the general meeting for a correct assessment of these schemes.
There are no share or share option schemes in place, and accordingly this matter is not subject to intervention by the General Meeting.
Consolidated Annual Report 2011 148
1.18. Information on the general meeting’s intervention in approving the central features of the retirement benefits system for members of the board of directors, audit board or other management personnel, as defined in Article 258-B.3 of the Securities Code
The General Meeting has not to date been involved in approving the main features of retirement pension schemes for members of the Board of Directors and Audit Board and other management personnel.
We should draw attention to the specific nature of the Company’s pension plan. Portucel was a state-owned company until 1991, with its business and procedures regulated by the special legislation applicable to this type of company, and during this period specific rules were approved on the retirement pensions of the directors. The fact that the legislation mentioned in the recommendation was not in force at the time when these rules were instituted means that the recommendation does not apply to Portucel.
1.19. Existence of provision in the Articles of Association requiring the general meeting to resolve, no less than every five years, on whether to maintain or eliminate a rule in the articles limiting the number of votes which can be held or cast by a single shareholder individually or in conjunction with other shareholders.
The Company’s Articles of Association contain no provision to this effect.
1.20. Defensive measures designed to cause automatic and serious erosion in the company’s assets in the event of a change of control or alterations to membership of the management body.
The Company has no defensive measures which automatically cause serious erosion in the Company’s assets in the event of a change of control or alterations to membership of the management body.
1.21. Significant agreements to which the company is party and which take effect, are amended or terminate in the event of a change in the control of the company, together with the respective effects, unless, due to its nature, disclosure of such agreements would be seriously detrimental to the company, except if the company is specifically required to disclose such information by other mandatory provision of law.
Some of the Company’s borrowing provides for early repayment in the event of a change in shareholder structure. Clauses of this type are included in 54% of the Company’s total medium and long term borrowing.
Consolidated Annual Report 2011 149
However, the Company considers that the contracts in question should not be disclosed as this would be prejudicial to its interests and offer not advantage to shareholders.
1.22. Agreements between the company and directors or managers, as defined by Article 248-B.3 of the Securities Code, which provide for compensation in the event of resignation, dismissal without due cause or termination of employment contract as a result of a change of control of the company.
There are no agreements between the Company and directors or managers, as defined by Article 248-B.3 of the Securities Code, which provide for compensation in the event of resignation, dismissal without due cause or termination of employment contract as a result of a change of control of the Company.
Consolidated Annual Report 2011 150
Chapter II
Management and Supervisory Bodies
Section I – General Issues
Model Adopted by Company
The Company’s Articles of Association provide for a single-tier management model, with a Board of Directors comprising executive and non-executive members and an Audit Board, in accordance with Article 278.1 a) of the Companies Code.
2.1. Company bodies and respective membership.
Audit Board:
Chairman: Miguel Camargo de Sousa Eiró
Full members: Duarte Nuno d’Orey da Cunha Gonçalo Nuno Palha Gaio Picão Caldeira
Alternate member: Marta Isabel Guardalino da Silva Penetra
Board of Directors:
Chairman: Pedro Mendonça de Queiroz Pereira
Directors: José Alfredo de Almeida Honório Manuel Soares Ferreira Regalado Adriano Augusto da Silva Silveira António José Pereira Redondo José Fernando Morais Carreira de Araújo Luís Alberto Caldeira Deslandes Manuel Maria Pimenta Gil Mata Francisco José Melo e Castro Guedes José Miguel Pereira Gens Paredes Paulo Miguel Garcês Ventura
Consolidated Annual Report 2011 151
Executive Board:
Chairman: José Alfredo de Almeida Honório
Directors: Manuel Soares Ferreira Regalado Adriano Augusto da Silva Silveira António José Pereira Redondo José Fernando Morais Carreira de Araújo
Company Secretary:
Full: António Pedro Gomes Paula Neto Alves Alternate: António Alexandre de Almeida e Noronha da Cunha Reis
2.2. Other committees with management or supervisory powers in the company, and respective membership.
Remuneration Committee:
Chairman: José Gonçalo Maury, representing Egon Zehnder
Members: João Rodrigo Appleton Moreira Rato Frederico José da Cunha Mendonça e Meneses
Corporate Governance Committee
Chairman: Luís Alberto Caldeira Deslandes
Members: José Fernando Morais Carreira de Araújo António Pedro Gomes Paula Neto Alves
Internal Control Committee
Chairman: Francisco José Melo e Castro Guedes
Consolidated Annual Report 2011 152
Directors: José Miguel Gens Paredes Jaime Alberto Marques Sennfelt Fernandes Falcão
Other committees in the Company:
Sustainability Committee
Chairman: Manuel Maria Pimenta Gil Mata
Members: Adriano Augusto Silveira João Manuel Alves Soares
Environmental Board
Chairman:: *Carlos Matias Ramos Members: João Santos Pereira Casimiro Pio Rui Ganho Maria da Conceição Cunha
* Substituting Fernando Ramoa Ribeiro since 26 October 2011
Pension Fund Supervisory Committee
Members: João António Xavier da Costa Ventura Manuel Luís Daun e Lorena Arouca António Alexandre de Almeida e Noronha da Cunha Reis Jorge do Carmo Guilherme Tareco Carlos Alberto Martins de Barros
Pension Fund Supervisory Committee
Members: Manuel Soares Ferreira Regalado Adriano Augusto da Silva Silveira Carlos Alberto Amaral Vieira Carlos Manuel Marques Brás
Consolidated Annual Report 2011 153
José Manuel Namorado Nordeste Óscar Manuel Monteiro da Silva Arantes Jerónimo Paulo Alves Ferreira Manuel Luís Daun e Lorena Arouca
Ethics Committee
Chairman Júlio de Lemos de Castro Caldas Members Rita Maria Lago do Amaral Cabral Rui Tiago Trindade Ramos Gouveia
Consolidated Annual Report 2011 154
2.3. Organizational charts or flow charts showing the division of responsibilities between the different company bodies, committees and/or departments, including information on scope of powers delegated, in particular concerning delegation of the day-to-day running of the company, or the distribution of special responsibilities assigned to specific directors or members of the audit board and a list of matters where powers cannot be delegated and powers effectively delegated.
Company Boards and Committees
BOARD OF DIRECTORS GENERAL MEETING Pedro Queiroz Pereira José Honório Manuel Regalado REMUNERATION COMMITTEE AUDIT BOARD Adriano Silveira António Redondo José Gonçalo Maury Miguel Eiró Fernando Araújo João Moreira Rato Duarte da Cunha Luís Deslandes Frederico Meneses Gonçalo Picão Caldeira Manuel Gil Mata Francisco Guedes COMPANY SECRETARY
António Neto Alves
PENSION FUND SUPERVISORY COMMITTEE
INTERNAL CONTROL COMMITTEE António Cunha Reis CORPORATE GOVERNANCE João Ventura COMMITTEE ASSET RISK ANALYSIS AND Francisco Guedes Manuel Arouca SUPERVISION COMMITTEE José Miguel Paredes Jorge Tareco Luís Deslandes Jaime Falcão Carlos M. de Barros Fernando Araújo ENIVRONMENTAL COMMITTEE António Neto Alves Manuel Regalado Carlos Matias Ramos Adriano Silveira João Santos Pereira Carlos Vieira Casimiro Pio Carlos Brás Rui Ganho José Nordeste SUSTAINABILITY COMMITTEE Maria da Conceição Cunha ETHICS COMMITTEE Oscar Arantes EXECUTIVE BOARD Manuel Gil Mata Jerónimo Ferreira Adriano Silveira José Honório Júlio Castro Caldas Manuel Arouca João Manuel Soares Manuel Regalado Rita Amaral Cabral Adriano Silveira Rui Gouveia António Redondo Fernando Araújo
Consolidated Annual Report 2011 155
Company Divisions and Departments
EXECUTIVE BOARD
José Honório Manuel Regalado Adriano Silveira António Redondo Fernando Araújo
CORPORATE IMAGE AND ADVISERS TO EXECUTIVE BOARD COMMUNICATION
António Cunha Reis Ana Nery Cândido Dias Almeida João Soares Pedro Moura INVESTOR RELATIONS
Joana Lã Appleton
INTERNAL AUDIT AND RISK LEGAL OFFICE ANALYSIS Jerónimo Ferreira António Neto Alves
FOREST AREA INDUSTRIAL AREA COMMERCIAL AREA CORPORATE AREA
PRODUCTION, OPERATION AND ENGENEERING PULP FINANCIAL CERTIFICATION
João Lé Guilherme Pedroso José Tátá Anjos Manuel Arouca
SALES, LOGISTIC AND BIOMASS ENVIRONMENT PAPER PLANNING AND CONTROL
Vitor Coelho Julieta Sansana Jorge Peixoto
SALES EUROPE
GENERAL SUPPORTING SERVICES ENERGY TAX AND ACCOUNTING António Porto Monteiro
Gonçalo Veloso de Sousa José Ricardo Rodrigues Nuno Neto
SALES INTERNATIONAL INNOVATION INFORMATION SYSTEMS André Leclercq José Maria Ataíde Mário Póvoa
SUPPLY CHAIN CACIA MILL HUMAN RESOURCES Eduardo Veiga José Nordeste João Ventura
FIGUEIRA DA FOZ INDUSTRIAL PURCHASING COMPLEX
Carlos Vieira António Barbeta
MARKETING
SETÚBAL INDUSTRIAL COMPLEX Hermano Mendonça
PULP MILL LOGISTICS
Óscar Arantes Gonçalo Vieira
PRODUCT PAPER MILL DEVELOPMENT AND QUALITY Carlos Brás Pedro Sarmento
ABOUT THE FUTURE Carlos Brás
Consolidated Annual Report 2011 156
Management Body
Portucel has a Board of Directors comprising nine members, with one chairman and eight directors. Five of the members are executive directors and form an Executive Board, which was elected and whose powers are delegated by the Board of Directors, and the other four members are non-executive.
The following powers are delegated to the Executive Board:
a) To propose the company’s policies, aims and strategies to the Board of Directors; b) To propose to the Board of Directors operating budgets and medium and long term investment and development plans, and to implement the same once approved; c) To approve budget alterations during the year, including transfers between cost centres not exceeding twenty million euros each year; d) To approve contracts for the acquisition of goods and services of a value each year no greater than twenty million euros; e) To approve financing contracts, to apply for bank guarantees, or to accept any other liabilities which represent increased indebtedness, totalling no more than twenty million euros each year; f) To acquire, dispose of or encumber the company’s fixed assets of a value, in each individual case, of up to five per cent of the paid up share capital; g) To lease or let any immoveable property; h) To represent the Company in or out of court, as claimant or respondent, and to bring or follow up any judicial or arbitral actions, confess or desist, settle or agree to arbitration; i) To acquire, dispose of or encumber holdings in other companies, of a value of no more than twenty million euros each year; j) To resolve on executing acquisition and disposal of own shares, when this has been resolved on by the general meeting, in keeping with the terms of such resolution; k) To manage holdings in other companies, in conjunction with the Chairman of the Board of Directors, namely by designating, with the latter’s agreement, the representatives to sit on the respective company boards, and setting guidelines for the acts of these representatives; l) To entre into, amend and terminate employment contracts; m) To open, transact and close bank accounts; n) To appoint Company representatives; o) In general, all powers which may lawfully be delegated, with any limitations deriving from the provisions of the preceding paragraphs.
In conjunction with the Chairman of the Board of Directors, the Executive Board may also resolve on the matters indicated in sub-paragraphs c), d), e) and i) above when the respective values, calculated on the terms set out therein, are greater than twenty million euros but no greater than fifty million euros.
The Chairman of the Board of Directors has the powers assigned by law and the articles of association.
Consolidated Annual Report 2011 157
The Executive Board may discuss all matters within the sphere of competence of the Board of Directors, notwithstanding that it may only resolve on matters delegated to it. All matters dealt with by the Executive Board, even when they fall within the scope of its delegated powers, are to be reported to the non-executive directors, who have access to the respective minutes and supporting documents.
The powers to alter any terms of contracts previously concluded and covered by the provisions of c), d), e) and i) lie with the body or bodies who would have powers to enter into them.
All decisions relating to definition of company strategy, and to the company’s general policies and the corporate structure of the group, shall be the sole province of the Board of Directors, and the Executive Board has no delegated powers to this effect.
Portucel’s articles of association do not authorize the Board of Directors to resolve on increases in share capital.
The Board of Directors as well as the Executive Committee have their own rules of procedure, which are available on the Company’s website.
Distribution of responsibilities
Specific responsibilities are assigned as described below to the following members of the Board of Directors, all of them belonging to the Executive Board:
• José Alfredo de Almeida Honório:
- Internal Auditing
• Manuel Soares Ferreira Regalado:
- Forestry activities - Finance - Human resources, organization and secretarial services - Purchasing - Investor relations
• Adriano Augusto da Silva Silveira:
- Industrial operations, Pulp, Energy and Paper - Maintenance and Engineering - Environment, Quality and Safety
Consolidated Annual Report 2011 158
- Innovation
• António José Pereira Redondo:
- Pulp and paper sales - Marketing - Communication and Image - Product development
• José Fernando Morais Carreira de Araújo:
- Accounts and taxation - Management control - Legal office - Information systems
2.4. Reference to the fact that the annual reports on the activities of the General and Supervisory Board, the Committee for financial affairs, the Audit Committee and the Audit Board include a description of the supervisory activities carried on, referring to any constraints detected, and that they are published on the company’s website, in conjunction with the other reports and financial statements.
The Company bodies with powers and responsibilities in this area are the Audit Board and the Internal Control Committee, both of which include in their annual reports an assessment of their supervisory work during the period together with an account of the Company’s activities, mentioning, when relevant, any constraints on their work, as well as any recommendations they may have for the bodies with powers of corporate management. No constraints on this work have to date been reported.
The Management Body’s assessment of the governance model adopted
The Board of Directors considers that the corporate governance model adopted has proven appropriate for the correct internal and external running of the Company. The Board of Directors has an Executive Board comprising five members who meet every week and discuss all matters relating to the management of the Company; there are quarterly meetings with non-executive members and detailed information flows between non-executive and executive members of the Board on all relevant company matters.
Consolidated Annual Report 2011 159
The Board of Director is also supported by a number of specialised committees which make their contribution in their specific areas.
No company officer or body has felt any constraint or drawn attention to the working of the corporate governance model, given the autonomy with which each of the bodies carries on its work, in view of the rigour and frequency with which information is transmitted.
2.5. Description of the internal control and risk management systems within the company, namely as regards the financial information disclosure system, the workings and effectiveness of this system.
The Company’s strategic aim in the field of risk-taking is to reduce to a minimum the possibility of occurrence of risks involved at the different levels of the company’s operations. The Company has various committees whose responsibilities include preventative action in this area: the Internal Control Committee, which has the mission of detecting and controlling relevant risks in the Company’s operations, and the Asset Risks Analysis and Supervision Committee, which pronounces on the systems for preventing property risks in place in the Group.
The Internal Control Committee is responsible for identifying, assessing and monitoring risks, which are then managed and/or mitigated by various units within the Company. One of the most important aspects of the work of these committees is the forecasting of the consequences of occurrence of the risks identified below, making for greater effectiveness in the adopting of measures which can be implemented immediately when these circumstances occur.
In addition to the risks involved in the actual business of producing pulp and paper, in which it is engaged, the main risks to which the group is subject are the following:
- financial; - property; - environmental; - health and safety
Measures taken in order to manage these risks, together with the internal structures responsible for this task, are described below.
Consolidated Annual Report 2011 160
Financial risk
The Group’s operations are exposed to a variety of financial risk factors: exchange rate risk, interest rate risk, credit risk and liquidity risk. The Group has a risk management programme which focuses its analysis on the financial markets, seeking to minimize potential adverse effects on the Group’s financial performance.
Risk management is handled by the Financial Department, in keeping with policies approved by the Board of Directors. The Financial Department assesses and manages financial risks, in close cooperation with the Group’s operating units.
The Board of Directors lays down principles for risk management as a whole and policies for specific areas, such as exchange rate risk, interest rate risk, credit risk, use of derivatives and other non-derivative financial instruments and investment of surplus liquidity.
It should be noted that the factors of financial and operating risk, together with the risk management systems in place, are detailed and quantified in no. 2 of the Notes to the Financial Statements.
Property risks
The Group’s manufacturing units are subject to the risks involved in any industrial operations, such as the risk of accident, breakdown or natural disaster, which could cause harm to their assets and interrupt the production process.
The Group manages these risks with care, on two complementary fronts:
(i) Implementation of a strict prevention plan at all industrial facilities, with a special emphasis on fire detection and automatic protection, monitoring systems, systems for protection of machinery and plant, and particularly on maintenance and the training of internal accident prevention and combat teams, backed by special material and human resources;
(ii) A comprehensive programme of property insurance, including multi-risk insurance (damage caused by external factors, including natural disasters), breakages and breakdown of machinery, and operating losses caused by these events.
In addition, the reinsurers in the insurance programme, represented by the lead reinsurer, conduct an inspection of all plant facilities, every two years, issuing a report with a set of recommendations which are adopted by the group.
Consolidated Annual Report 2011 161
As described above, the company has a Property Risk Analysis and Monitoring Committee which pronounces on the measures taken to meet the recommendations issued as a result of inspections by reinsurers.
Environmental risks
The Board of Directors has paid special attention to environmental risks, which are managed at the level of the industrial units by the respective plant management divisions and centrally by the Environmental Board, whose members are appointed by the Board of Directors and report directly to the Executive Board. These members comprise three to five individuals of recognized expertise in the field of environmental protection.
The Environmental Committee’s mission is to monitor and to issue its recommendations on environmental issues relating to the company’s operations and, whenever so requested by the Board of Directors, to give its opinion and recommendations on the environmental impact of the company’s developments, especially in the light of the legal rules in this area.
Health and Safety at Work
In the course of 2007 the Group reorganized its health and safety arrangements at its different plants, in order to comply with legal requirements, implementing a similar structure at all industrial facilities.
In keeping with labour law, Health and Safety Committees have been set up at the different plants, with responsibility for assessing potential hazards in the plants and for issuing recommendations for eliminating these risks.
During 2011, healthy and safety activities were pursued at the Group’s different industrial complexes in a regular and sustained manner, with high levels of performance and attainment of targets, resulting in good accident rate indicators at the industrial plants.
We should point out that with the opening of the new paper mill in Setúbal in 2009, another major industrial facility was added to the list of premises to be controlled, and the existing safety certifications at the Setúbal site had to be extended accordingly
Sustained efforts to improve health and safety at the Setúbal, Figueira da Foz and Cacia complexes have included regular meetings of the health and safety committees. Half the members of these committees are legally elected workers’ representatives, making this a forum for permanent consultation with the workforce in this field.
Ongoing training in safety issues was provided to all employees over the year at all industrial complexes, starting with induction training for new recruits and continuing with other specific training activities.
Consolidated Annual Report 2011 162
The Group has also implemented all recommendations made by experts in relation to industrial risks on the basis of the audits conducts, with a view to continuous and sustained improvement of its fire prevention and fire fighting resources.
“Emergency Response Exercises” were conducted at all plants, catering for a variety of scenarios, so as to assure expertise and readiness for the Internal Emergency Plan.
Financial reporting process
In accordance with the provisions of Article 248.6 of the Securities Code, as amended by Decree-Law 52/2006, of 15 March, issuers of securities are required to draw up and keep rigorously up to date a list of their staff, with or without employment contracts, who have regular or occasional access to privileged information.
Each member of staff listed has been informed of the Company’s decision to include him or her and also of his or her legal duties and obligations, as well as the consequences of disclosure or abusive use of privileged information. Of the staff included on the list, only a small number is involved in the disclosure of privileged financial information.
All these employees and officers are also aware of the principles of professional ethics laid down in the Code or Ethics, contained in Annex I to this report, in particular with regard to duties of confidentiality and secrecy.
2.6. Responsibility of the management body and supervisory body for creating and running internal control and risk management systems in the company, and for assessing the workings of these systems and adjusting them to the company’s needs.
All the committees existing in the Company, except for the Remuneration Committee, are set up by resolution of the Board of Directors. The supervisory body is elected by the shareholders.
When it sees fit, the Audit Board may request from the management body and the other committees in the company structure all the information it deems necessary for an adequate assessment of the Company’s internal risks, notwithstanding the flow of information provided on a periodic basis by the management body to the Audit Board and its joint meetings with the Board of Directors. As stated in the preceding item, the Company’s hierarchical structure includes bodies and systems at each industrial unit with responsibility for risk assessment.
Consolidated Annual Report 2011 163
2.7. Indication of the existence of rules of procedure for corporate bodies or any internally defined rules on incompatibility and the maximum number of positions that a member is entitled to hold and where these rules may be consulted.
The company’s management and supervisory bodies have internal rules of procedure, which are published on the company’s website, in the investor relations / Corporate Governance area, and are therefore freely available for consultation.
In addition, there is no specific rule on the maximum number of positions any individual may hold.
Section II – Board of Directors
2.8. If the chairman of the management body has executive powers, information on procedures for coordinating the work of non-executive members which assure that their decisions are independent and informed.
The Chairman of the Board of Directors does not have executive powers.
2.9. Identification of the main economic, financial and legal risks to which the company is exposed in the course of its business.
In the course of its business, the Group is exposed to a variety of economic, financial and legal risks, the most significant of which are detailed below:
1. Procurement of timber, and eucalyptus in particular, is subject to price variations and difficulties of supply which could have a significant impact on the production costs of pulp manufacturers;
2. Market prices of pulp and paper, which in the past have been markedly cyclical, significantly influence the Portucel Group’s revenues and profitability;
3. Any reduction in demand for pulp and UWF paper, especially in EU and US markets, could have a significant impact on Group sales;
4. The Group is subject to the risk of default on the credit it grants to its customers, and has adopted a policy of hedging this risk within given levels by negotiating credit insurance from a specialist independent insurer. Sales not covered by credit insurance are subject to rules which assure they are made to customers with an appropriate credit track record;
Consolidated Annual Report 2011 164
5. Increased competition on pulp and paper markets could have a significant impact on prices and consequently on Group profitability;
6. Variations in the exchange rate between the euro and other currencies, notably the US dollar and sterling, could have an impact on Company business;
7. Variations in interest rates, and in particular in short terms rates, could have a significant impact on the Group’s results;
8. There is also a liquidity risk which the Group manages in two ways. In the first place, it makes sure that its financial borrowing includes a large medium to long term component with maturities matched to the characteristics of the industry in which it operates.
In addition, the Group has contracted credit facilities from financial institutions; these are available at any time, with an upper limit which guarantees adequate liquidity.
9. In recent years, European Union legislation on environmental issues has become more restrictive, especially with regard to control of effluents.
The Portucel Group complies with all legal requirements, and has accordingly made sizeable investments in recent years. Although no significant legislative changes are foreseen in the near future, there is the possibility that the Group will have to make additional investments in this area, in order to comply with any new limits which may be approved.
10. The Portucel Group’s ability to implement successfully the strategies defined depend on its ability to recruit and retain the best qualified and able staff for each position. Although the Group’s human resources policy is geared to achieving this goal, it cannot preclude the possibility of future limitations in this area;
11. The Group’s industrial plants are subject to the risks involved in any industrial activity, such as the risk of accidents, breakdowns or natural disasters which could damage the Group’s assets or cause temporary stoppages to the production process. This risks could likewise affect the Group’s main customers and suppliers, which would have a significant impact on levels of profitability, if it were not possible to find alternative customers to maintain the level of sales or suppliers which allowed it to maintain the same cost structure;
12. The Portucel Group’s operations are exposed to the risks related to forest fires, in particular: (i) destruction of present and future timber stocks; and (ii) the added costs of forestry operations and subsequent preparation of land for planting;
Consolidated Annual Report 2011 165
13. Energy sales account for an important part of Group’s business, meaning that a significant change in electricity tariffs could have a significant impact on the Company’s results.
14. The listed price of Portucel shares could experience volatility and be subject to fluctuations due to a range of factors. By way of example, these fluctuations could be caused by: (i) changes in investor expectations regarding the prospects for the sectors and markets in which the Group operates; (ii) announcements of technological innovations; (iii) launch of new products or services by the Group or its competitors; (iv) actual or expected variations in results; (v) changes in the financial estimates of securities analysts; (vi) any significant capital expenditure projects undertaken by the Group; (vii) any strategic partnerships or joint ventures in which the Group may participate; (viii) unfavourable economic prospects; (ix) changing conditions in securities markets; and (x) poor liquidity due to the existence of a controlling shareholder with approximately 76% of the share capital.
Many of the risk factors identified are beyond the Portucel Group’s control, especially in the case of market factors which can have a fundamental and negative effect on the market price of the issuer’s shares, irrespective of the Group’s operational and financial performance.
2.10. Powers of the management body, in particular with regard to resolutions on increasing the share capital
The powers of the management body are those assigned by the Companies Code and those set out in Article 16, 17 and 18 of the Articles of Association.
Under the Articles of Association, the Board of Directors has no powers to resolve on increases in share capital.
2.11. Information on the policy of rotating areas of individual responsibility in the Board of Directors, and in particular responsibility for financial affairs, and on the rules applicable to the appointment and replacement of members of the management and supervisory bodies
As explained in Chapter 2.3 of this Report, dealing with the distribution of specific powers, financial affairs are overseen by two members of the Board of Directors, given that financial matters are managed separately from accounts and taxation. No policy has been defined with regard to rotating the special areas of responsibility within the board of directors, and there are no rules on this matter. This is in fact regarded as a question of strategic interest which should be determined by the Company and its Shareholders, in accordance with the specific circumstances of the Company’s governance and business model.
Consolidated Annual Report 2011 166
The special areas of responsibility exercised by the Board of Directors have particularities proper to each type of business and cannot be assigned without duly considering the characteristics of the fields in which the companies carry on their business.
2.12. Number of meetings of the management and supervisory bodies, and reference to the minutes of these meetings
Body Number of meetings in 2011 Board of Directors 7 Audit Board 9
Minutes were drawn up for all meetings.
2.13. Indication of the number of meetings of the Executive Board or the Executive Board of Directors, together with reference to the taking of minutes of these meetings and the forwarding of the same, together with the notice of meetings, as applicable, to the Chairman of the Board of Directors, the Chairman of the Audit Board or the Audit Committee, to the Chairman of the General and Supervisory Board and to the Chairman of the Financial Affairs Committee.
Body Number of meetings in 2011 Executive Board 44
There were 44 meetings of the Executive Board, all of which were duly planned, and their minutes were forwarded to the Chairman of the Board of Directors and to the Chairman of the Audit Board; the minutes are also at the disposal of the Internal Control Committee.
2.14. Indication of the executive and non-executive members and, with regard to the latter, a list of members who would comply, if they were applicable, with the incompatibility rules provided for in article 414-A.1, except for item b), and the independence criterion referred to in article 414.5, both of the Companies Code.
Portucel has a Board of Directors comprising eleven members – one Chairman and ten other Directors. Five of the members are executive directors and form an Executive Board, which was elected and whose powers were delegated by the Board of Directors, and the other six are non-executive directors.
Identification of the members of the Board of Directors, distinguishing between executive and non-executive directors:
Chairman of the Board of Directors: Pedro Mendonça de Queiroz Pereira (Non-executive) Member of the Board of Directors: José Alfredo de Almeida Honório (Chairman of the Executive Board)
Consolidated Annual Report 2011 167
Member of the Board of Directors: Manuel Soares Ferreira Regalado (Member of Executive Board) Member of the Board of Directors: Adriano Augusto da Silva Silveira (Member of Executive Board) Member of the Board of Directors: António José Pereira Redondo (Member of Executive Board) Member of the Board of Directors: José Fernando Morais Carreira Araújo (Member of Executive Board) Member of the Board of Directors: Luís Alberto Caldeira Deslandes (Non-executive) Member of the Board of Directors: Manuel Maria Pimenta Gil Mata (Non-executive) Member of the Board of Directors: Francisco José Melo e Castro Guedes (Non-executive) Member of the Board of Directors: José Miguel Pereira Gens Paredes (Non-executive) Member of the Board of Directors: Paulo Miguel Garcês Ventura (Non-executive)
For the purposes of Article 414.5 of the Companies Code, we hereby disclose that the non-executive members of the Board of Directors identified above do not meet the requirements relating to the independence rules, and also for the purpose of Article 414-A.1, except for sub-paragraph b), one of the non-executive members of the Board of Directors, Mr. Pedro Mendonça de Queiroz Pereira, does not meet the requirements of the incompatibility rules, namely with regard to sub-paragraph h), insofar as he holds directorships in five companies outside the Portucel Group.
2.15. Indication of the legal and regulatory rules and other criteria forming the basis for the management body’s assessment of its members’ independence.
The assessment criteria are those set out in the Companies Code, the Securities Code and the Securities Market Commission Regulations in force.
2.16. Indication of the procedural rules for the selection of candidates for non-executive directorships and how these rules preclude any interference in the process by executive directors
There are no roles on the selection process for prospective non-executive directors. The selection process for all directors (executive and non-executive) is the sole responsibility of the company’s shareholders, who exercise this authority at the General Meeting. The executive directors accordingly have no say in the selection of non- executive directors.
2.17. Reference to the fact that the company’s annual management report includes a description of the work undertaken by non-executive directors and any constraints detected.
Annex II to this report contains a description of the work performed by the non-executive directors.
Consolidated Annual Report 2011 168
2.18. Professional qualifications of the members of the Board of Directors, indicating their professional activities over at least the last five years, the number of shares held in the company, the date of first appointment and of expiry of their term of office. and 2.19. Office held by members of the Board of Directors in other companies, indicating that held in other companies of the same group.
All the members of the Board of Directors hold office in other companies, as specified below:
Pedro Mendonça de Queiroz Pereira
1. Type of directorship: Non-executive.
2. No. of shares held in company: holds no shares in company.
3. Qualifications: Completed secondary education in Lisbon and attended Instituto Superior de Administração.
4. Date when first appointed and expiry of term of office: 2004-2014.
5. Management office held in companies:
Companies in the Portucel Group:
- Chairman of the Board of Directors of Portucel - Empresa Produtora de Pasta e Papel, S.A. - Chairman of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Chairman of the Board of Directors of About the Future – Empresa Produtora de Papel, S.A.
Other Companies / Entities:
- Manager of Cimentospar – Participações Sociais, SGPS, Lda. - Chairman of the Board of Directors of Ciminpart - Investimentos e Participações, SGPS, S.A. - Chairman of the Board of Directors of Celcimo, S.L. - Chairman of the Board of Directors of CMP - Cimentos Maceira e Pataias, S.A. - Chairman of the Board of Directors of Secil - Companhia Geral de Cal e Cimento, S.A. - Chairman of the Board of Directors of Secilpar, SL. - Chairman of the Board of Directors of Seinpart - Participações, SGPS, S.A.
Consolidated Annual Report 2011 169
- Chairman of the Board of Directors and Chairman of the Executive Board of Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. - Chairman of the Board of Directors of Seminv - Investimentos, SGPS, S.A - Chairman of the Board of Directors of Cimigest, SGPS, S.A. - Chairman of the Board of Directors of Costa das Palmeiras – Turismo e Imobiliário, S.A. - Manager of Ecovalue – Investimentos Imobiliários, Lda. - Chairman of the Board of Directors of Longapar, SGPS, S.A. - Chairman of the Board of Directors of OEM - Organização de Empresas, SGPS, S.A.. - Chairman of the Board of Directors of Sodim SGPS, S.A. - Member of the Board of Directors of Tema Principal – SGPS, S.A. - Chairman of the Board of Directors of Terraços d´Areia – SGPS, S.A. - Chairman of the Board of Directors of Vértice – Gestão de Participações, SGPS, S.A.
6. Other professional activities in the last 5 years:
- Chairman of the Board of Directors of Cimo – Gestão de Participações Sociais, S.A. - Chairman of the Board of Directors of Longapar, SGPS, S.A. - Chairman of the Board of Directors of Semapa Inversiones, SL - Manager of Ecolua – Actividades Desportivas, Lda. - Member of the Board of Directors of Portucel Soporcel Floresta – SGPS, S.A.
José Alfredo de Almeida Honório
1. Type of directorship: Executive.
2. No. of shares held in company: holds no shares in company.
3. Qualifications: Degree in economics from the Faculty of Economics, University of Coimbra, 1980.
4. Date when first appointed and expiry of term of office: 2004-2014.
5. Management office held in companies:
Companies in the Portucel Group:
- Chairman of the Executive Board and Member of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A.
Consolidated Annual Report 2011 170
- Chairman of the Executive Board and Member of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Chairman of the Executive Board and Member of the Board of Directors of About the Future – Empresa Produtora de Papel, S.A. - Chairman of the Board of Directors of Portucel Florestal – Empresa de Desenvolvimento Agro- Florestal, S.A. - Chairman of the Board of Directors of PortucelSoporcel Energia SGPS,S.A. - Chairman of the Board of Directors of PortucelSoporcel Floresta SGPS, S.A. - Chairman of the Board of Directors of PortucelSoporcel Internacional – SGPS, S.A. - Chairman of the Board of Directors of PortucelSoporcel Papel, SGPS, S.A. - Chairman of the Board of Directors of PortucelSoporcel Participações, SGPS, S.A. - Chairman of the Board of Directors of PortucelSoporcel Pulp, SGPS, S.A. - Chairman of the Board of Directors of Countrytarget, SGPS - Chairman of the Board of Directors of Eucaliptusland, SA - Chairman of the Board of Directors of PortucelSoporcel Fine Paper, SA - Chairman of the Board of Directors of Portucel Papel Setúbal S.A. - Chairman of the Board of Directors of PortucelSoporcel Florestal, S.A. (previously Aliança Florestal – Sociedade para o Desenvolvimento Agro-Florestal, SA.) - Chairman of the Board of Directors of Soporcel Pulp, SA - Directors of Portucel Soporcel Sales & Marketing SA - Member of the Board of Directors of Portucel Soporcel Switzerland, Ltd
Other Companies / Entities:
- Member of the Board of Directors of Seminv – Investimentos, SGPS, S.A. - Manager of Cimentospar – Participações Sociais, SGPS Lda. - Member of the Board of Directors of Celcimo, S.L. - Member of the Board of Directors of Ciminpart – Investimentos e Participações, SGPS, S.A. - Member of the Board of Directors of Seinpart Participações, SGPS, S.A. - Member of the Board of Directors of CMP – Cimentos Maceira e Pataias, S.A. - Member of the Board of Directors of Secil - Companhia Geral de Cal e Cimento, S.A. - Member of the Board of Directors and Member of the Executive Board of Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. - Member of the Board of Directors and of the Executive Board of CEPI – Confederation of European Paper Industries - Chairman of the General Board and Member of the Executive Board of CELPA – Associação da Indústria Papeleira
Consolidated Annual Report 2011 171
6. Other professional activities in the last 5 years:
- Chairman of the Management Board of Tecnipapel, Soc. de Transformação e Distribuição de Papel, Lda. - Member of the Management Board of RAIZ - Instituto de Investigação da Floresta e Papel - Member of the Board of Directors of Bosques do Atlântico, S.L. - Member of the Board of Directors of Betopal, SL. - Member of the Board of Directors of CIMO – Gestão de Participações, SGPS, S.A. - Member of the Board of Directors of Longapar, SGPS, S.A - Member of the Board of Directors of Semapa Inversiones, S.L. - Member of the Board of Directors of Parseinges – Gestão de Investimento, SGPS, S.A. - Chairman of the Management Board of IBET – Instituto de Biologia Experimental e Tecnológica.
Manuel Soares Ferreira Regalado
1. Type of directorship: Executive
2. No. of shares held in company: holds no shares in company
3. Qualifications: Degree in Financial Affairs, from the Instituto Superior de Ciências Económicas e Financeiras, Lisbon (ISEG), 1972; Senior Executive Programme (SEP), London Business School (1997)
4. Date when first appointed and expiry of term of office: 2004- 2014
5. Management office held in companies:
Companies in the Portucel Group:
- Member of the Executive Board and Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Executive Board and Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Executive Board and Board of Directors of About the Future – Empresa Produtora de Papel, S.A. - Chairman of the Board of Directors of Aflomec – Empresa de Exploração Florestal, S.A. - Member of the Board of Directors of Portucel Soporcel Florestal SA - Chairman of the Board of Directors of Atlantic Forests – Comércio de Madeiras, S.A. - Chairman of the Board of Directors dos Bosques do Atlântico, SL
Consolidated Annual Report 2011 172
- Chairman of the Board of Directors Cofotrans – Empresa de Exploração Florestal, S.A. - Chairman of the Board of Directors of Enerforest – Empresa de Biomassa para Energia, S.A. - Member of the Board of Directors of PortucelSoporcel Internacional, SGPS, S.A. - Member of the Board of Directors of Portucel Florestal – Empresa de Desenvolvimento Agro- Florestal, S.A. - Member of the Board of Directors of PortucelSoporcel Energia SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Floresta, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Papel, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Participações SGPS, S.A. - Chairman of the Board of Directors of Sociedade de Vinhos de Espirra – Produção e Comercialização de Vinhos - Chairman of the Board of Directors dos Viveiros Aliança – Empresa Produtora de Plantas, S.A. - Member of the Board of Directors of Portucel Soporcel Sales & Marketing SA - Manager of Portucel Moçambique, Lda - Member of the Board of Directors of Countrytarget, SGPS - Member of the Board of Directors of Eucaliptusland, SA - Member of the Board of Directors of PortucelSoporcel Fine Paper, SA - Member of the Board of Directors of Soporcel Pulp, SA - Member of the Board of Directors of Portucel Soporcel Papel, SGPS, SA - Member of the Board of Directors of Portucel Soporcel Switzerland Ltd - Member of the Board of Directors of Portucel Papel Setúbal S.A. - Member of the Board of Directors of PortucelSoporcel Pulp, SGPS, S.A. - Member of the Management Board of PortucelSoporcel Abastecimento de Madeira, ACE
Other Companies / Entities:
- Member of the General Board of CELPA - Associação da Indústria Papeleira
6. Other professional activities in the last 5 years:
- Member of the Management Board of Tecnipapel, - Sociedade de Transformação e Distribuição de Papel, Lda. - Member of the Management Board of RAIZ - Instituto de Investigação da Floresta e Papel - Chairman of the Management Board of Aflotrans – Empresa de Exploração Florestal, S.A.
Consolidated Annual Report 2011 173
Adriano Augusto da Silva Silveira
1. Type of directorship: Executive.
2. No. of shares held in company: holds 2,000 shares in the company.
3. Qualifications: Degree in Chemical Engineering from the University of Porto, 1975.
4. Date when first appointed and expiry of term of office: 2007- 2014.
5. Management office held in companies:
Companies in Portucel Group:
- Member of the Executive Board and Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Executive Board and Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Executive Board and Board of Directors of About The Future – Empresa Produtora de Papel, S.A. - Member of the Board of Directors of PortucelSoporcel Internacional, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Energia, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Floresta, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Papel, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Participações, SGPS, S.A. - Member of the Management Board of Tecnipapel - Sociedade de Transformação e Distribuição de Papel, Lda - Chairman of the Board of Directors of SPCG – Sociedade Portuguesa de Co-geração, S.A. - Chairman of the Board of Directors of Enerpulp – Co-geração Energética de Pasta, S.A. - Chairman of the Board of Directors of EMA 21, S.A. - Member of the Board of Directors of Portucel Soporcel Sales & Marketing SA - Vogal da Direcção do RAIZ – Instituto de Investigação da Floresta e Papel - Member of the Board of Directors of Countrytarget, SGPS - Member of the Board of Directors of Eucaliptusland, SA - Member of the Board of Directors of PortucelSoporcel Fine Paper, SA - Member of the Board of Directors of Soporcel Pulp, SA - Member of the Board of Directors of Portucel Papel Setúbal SA - Member of the Board of Directors of Portucel Soporcel Switzerland Ltd - Member of the Board of Directors of PortucelSoporcel Pulp, SGPS, SA
Consolidated Annual Report 2011 174
- Member of the Management Board of PortucelSoporcel Abastecimento de Madeira, ACE
6. Other professional activities in the last 5 years:
- Member of the Management Board of Tecnipapel, - Sociedade de Transformação e Distribuição de Papel, Lda. - Member of the Management Board of RAIZ – Instituto de Investigação da Floresta e Papel - Director of EMA Cacia – Engenharia e Manutenção Industrial, ACE - Director of EMA Figueira da Foz – Engenharia e Manutenção Industrial, ACE - Director of EMA Setúbal – Engenharia e Manutenção Industrial, ACE - Central Engineering Director for the Portucel Soporcel Group
António José Pereira Redondo
1. Type of directorship: Executive.
2. No. of shares held in company: holds 6,000 shares in the company.
3. Qualifications: Degree in Chemical Engineering, University of Coimbra (1987); attended 4th year in Business Management at Universidade Internacional; MBA specialising in marketing, from the Portuguese Catholic University (1998).
4. Date when first appointed and expiry of term of office: 2007- 2014.
5. Management office held in companies:
Companies in Portucel Group:
- Member of the Executive Board and Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Executive Board and Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Executive Board and Board of Directors of About The Future - Empresa Produtora de Papel, S.A. - Member of the Board of Directors of PortucelSoporcel Energia, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Floresta, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Papel, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Participações, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Internacional, SGPS, S.A.
Consolidated Annual Report 2011 175
- Chairman of the Board of Directors of Portucel Soporcel España S.A. - Member of the Management Board of PIT – Portucel International Trading GmbH - Member of the Board of Directors of Portucel Soporcel Sales & Marketing SA - Member of the Board of Directors of Countrytarget, SGPS - Member of the Board of Directors of Eucaliptusland, SA - Member of the Board of Directors of PortucelSoporcel Fine Paper, SA - Member of the Board of Directors of Soporcel Pulp, SA - Member of the Board of Directors of Portucel Papel Setúbal SA - Member of the Board of Directors of Portucel Soporcel Afrique du Nord, SA - Member of the Board of Directors of Portucel Soporcel Austria GMBH - Member of the Board of Directors of Portucel Soporcel Deutschland GMBH - Member of the Board of Directors of Portucel Soporcel France EURL - Chairman of the Board of Directors of Portucel Soporcel International BV - Chairman of the Board of Directors of Portucel Soporcel Itália, SRL - Member of the Board of Directors of Portucel Soporcel North America, INC - Member of the Board of Directors of Portucel Soporcel Poland SP Z.O.O. - Chairman of the Board of Directors of Portucel Soporcel UK LTD - Member of the Board of Directors of Portucel Soporcel Switzerland Ltd - Member of the Board of Directors of PortucelSoporcel Pulp, SGPS, SA
6. Other professional activities in the last 5 years:
- Member of the Management Board of Tecnipapel, Lda - Sales and Marketing Director for the Portucel Soporcel Group
José Fernando Morais Carreira de Araújo
1. Type of directorship: Executive.
2. No. of shares held in company: holds no shares in company.
3. Qualifications: Degree in Accountancy and Administration from Instituto Superior de Contabilidade e Administração do Porto (ISCAP) (1986); Higher Studies in Financial Control, Instituto Superior de Contabilidade e Administração do Porto (ISCAP) (1992); Official Auditor since 1995; Degree in law, Universidade Lusíada do Porto (2000); MA in accountancy, Instituto Superior de Ciências do Trabalho e da Empresa, Lisbon (ISCTE); Postgraduate studies in Advanced Financial Accounting; Postgraduate studies in fiscal law, Lisbon Faculty of Law – 2002/2003 Postgraduate studies in Corporate Governance, Instituto Superior de Economia e Gestão, Lisbon (ISEG) – 2006/2007.
Consolidated Annual Report 2011 176
4. Date when first appointed and expiry of term of office: 2007-2014.
5. Management office held in companies:
Companies in Portucel Group:
- Member of the Executive Board and Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Executive Board and Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Executive Board and Board of Directors of About The Future - Empresa Produtora de Papel, S.A. - Member of the Board of Directors of Country Target SGPS, S.A. - Member of the Board of Directors of Eucaliptusland, S.A. - Member of the Board of Directors of Impactvalue, SGPS, S.A. - Chairman of the Management Board of PIT – Portucel International Trading GmbH - Manager of Portucel Moçambique, Lda - Member of the Board of Directors of Portucel Papel Setúbal S.A. - Chairman of PortucelSoporcel Cogeração de Energia, S.A. - Member of the Board of Directors of Bosques do Atlântico, S.L. - Member of the Board of Directors of PortucelSoporcel Energia, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Fine Paper S.A. - Member of the Board of Directors of PortucelSoporcel Floresta, SGPS, S.A. - Member of the Board of Directors of PortucelSoporcel Papel, SGPS, S.A. - Member of the Management Board of PortucelSoporcel Logística do Papel - Member of the Board of Directors of PortucelSoporcel Participações, SGPS, S.A. - Member of the Board of Directors of Soporcel Pulp, SA - Member of the Board of Directors of Portucel Soporcel Sales & Marketing SA - Member of the Board of Directors of Portucel Soporcel España, S.A. - Member of the Board of Directors of Portucel Soporcel International BV - Member of the Board of Directors of Portucel Soporcel UK, Ltd. - Member of the Board of Directors of Portucel Soporcel France, EURL - Member of the Board of Directors of Portucel Soporcel Itália, SRL - Member of the Board of Directors of Portucel Soporcel Deutschland, GmbH - Member of the Board of Directors of Portucel Soporcel Austria, GMBH - Member of the Management Board of Portucel Soporcel Afrique du Nord, S.A. - Member of the Management Board of Portucel Soporcel Poland SP.Z.O.O. - Member of the Board of Directors of Portucel Soporcel North America, INC
Consolidated Annual Report 2011 177
- Member of the Board of Directors of Portucel Soporcel Switzerland LTD - Member of the Board of Directors of PortucelSoporcel Pulp, SGPS, S.A. - Chairman of the Board of Directors of PortucelServiços Partilhados, S.A.
6. Other professional activities in the last 5 years:
- Member of the Management Board of Tecnipapel, Lda - Chairman of the Board of Directors of Setipel – Serviços Técnicos para a Indústria Papeleira, S.A. - Accounts and Tax Manager at Semapa, SGPS, S.A. from May 2002, and also at Secil S.A. from May 2002 to June 2006 and in Portucel S.A. from July 2006 to March 2007.
Luís Alberto Caldeira Deslandes
1. Type of directorship: Non-executive.
2. No. of shares held in company: holds no shares in company.
3. Qualifications: Chemical Engineer - Instituto Superior Técnico de Lisboa; Brewery Engineer – Inst. Superieur D’Agronomie de Louvain.
4. Date when first appointed and expiry of term of office: 2001- 2014.
5. Management office held in companies:
• Portucel Group Companies:
- Member of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Board of Directors of About The Future - Empresa Produtora de Papel, S.A.
6. Other professional activities in the last 5 years:
- Member of the Executive Board of Portucel – Empresa Produtora de Pasta e Papel, S.A. for the three-year term 2004-2006
- Chairman of the Board of Directors of companies in the Portucel group: - Portucel Soporcel Italy SRL - Portucel Soporcel France EURL - Portucel Soporcel UK Ltd
Consolidated Annual Report 2011 178
- Portucel Soporcel International Bv - Portucel Soporcel North America Inc - Portucel Soporcel Deutschland GmbH - Portucel Soporcel Austria GmbH
Manuel Maria Pimenta Gil Mata
1. Type of directorship: Non-executive.
2. No. of shares held in company: holds no shares in company.
3. Qualifications: Degree in chemical engineering from the Faculty of Engineering, Porto, 1966; International Courts in Senior Management in the Paper and Pulp Industry, Swedish paper Industry Federation, Markaryd, 1987.
4. Date when first appointed and expiry of term of office: 1998 - 2014.
5. Management office held in companies:
Companies in Portucel Group:
- Member of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Board of Directors of About The Future - Empresa Produtora de Papel, S.A.
6. Other professional activities in the last 5 years: - Associate Guest Professor of the Department of Chemical Engineering, University of Coimbra
Francisco José Melo e Castro Guedes
1. Type of directorship: Non-executive.
2. No. of shares held in company: holds no shares in company.
3. Qualifications: Degree in Finance from Instituto Superior de Ciências Económicas e Financeiras – Lisboa (1971); MBA from INSEAD – Fontainebleau. France (1976)
4. Date when first appointed and expiry of term of office: 2009-2014.
Consolidated Annual Report 2011 179
On 1 June 2009, in view of the resignation from the board of Eng. Carlos Eduardo Coelho Alves, the Board of Directors resolved to replace this member by co-opting Dr. Francisco José Melo e Castro Guedes as non- executive director for the term of office underway (2007-2010). The cooption was ratified at the General Meeting held on 15 March 2010.
5. Management office held in companies:
Companies in Portucel Group:
- Member of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Board of Directors of About The Future - Empresa Produtora de Papel, S.A.
Other Companies / Entities:
- Member of the Board of Directors and member of Executive Board of Semapa – Sociedade de Investimento e Gestão, SGPS, SA. - Member of the Board of Directors of Celcimo, S.L. - Member of the Board of Directors of CMP- Cimentos Maceira e Pataias, S.A. - Member of the Board of Directors of Secil – Companhia Geral de Cal e Cimento, S.A. - Member of the Board of Directors of Seminv Investimentos, SGPS, SA - Member of the Board of Directors of SCG – Société des Ciments de Gabès, SA - Member of the Board of Directors of Ciments de Sibline, SGPS, S.A.L. - Member of the Board of Directors of Cimimpart - Investimentos e Participações, SGPS, S.A. - Member of the Board of Directors of Seinpart Participações, SGPS, S.A. - Chairman of the Board of Directors of Semapa Inversiones, SL - Member of the Board of Directors of Silonor, S.A. - Member of the Board of Directors of Secilpar, SL. - Manager of Cimentospar – Participações Sociais, SGPS, Lda - Chairman of the Board of Directors of Viroc Portugal – Indústrias de Madeira e Cimento, S.A - Member of the Board of Directors of So.I.Me Liban S.A.L. - Manager of Serife – Sociedade de Estudos e Realizações Industriais e de Fornecimento de Equipamento, Lda. - Manager of Florimar – Gestão e Participações, SGPS, Soc.Unipessoal, Lda; - Manager of Hewbol – SGPS, Lda.
6. Other professional activities in the last 5 years: - Member of the Board of Directors of Parseinges - Gestão de Investimentos, SGPS, S.A. - Chairman of the Board of Directors of Verdeoculto – Investimentos, SGPS, S.A.
Consolidated Annual Report 2011 180
José Miguel Pereira Gens Paredes
1. Type of directorship: Non-executive.
2. No. of shares held in company: holds no shares in company
3. Qualifications: Degree in Economics(1984)
4. Date when first appointed and expiry of term of office: 2011 – 2014
5. Management office held in companies:
Companies in Portucel Group:
- Member of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Board of Directors of About The Future - Empresa Produtora de Papel, S.A.
Other Companies / Entities:
- Chairman of the Board of Directors of Abapor Comércio e Indústria de Carnes, S.A. - Member of the Board of Directors of Aprovechamiento Integral de Subprodutos Ibéricos, S.A. - Manager of Biological - Gestão de Resíduos Industriais, L.da. - Member of the Board of Directors of Celcimo, SL. - Manager of Cimentospar - Participações Sociais, SGPS, L.da. - Chairman of the Board of Directors of ETSA Investimentos, SGPS, S.A. (formerly called VERDEOCULTO - Investimentos, SGPS, S.A.) - Chairman of the Board of Directors of ETSA, SGPS, S.A. - Member of the Board of Directors of GREAT EARTH - Projectos, S.A. - Chairman of the Board of Directors of I.T.S. - Indústria Transformadora de Subprodutos, S.A. - Chairman of the Board of Directors of Sebol - Comércio e Indústria de Sebo, S.A. - Member of the Board of Directors of Seinpart - Participações, SGPS, S.A. - Member of the Board of Directors of Seminv - Investimentos, SGPS, S.A. - Member of the Board of Directors of Cimipar – Sociedade Gestora de Participações Sociais, S.A. - Member of the Board of Directors of Cimo – Gestão de Participações, SGPS, S.A. - Member of the Board of Directors of Longapar, SGPS, S.A.
Consolidated Annual Report 2011 181
- Member of the Board of Directors of MOR ON-LINE – Gestão de Plataformas de Negociação de Resíduos On-Line, S.A. - Member of the Board of Directors of O E M – Organização de Empresas, SGPS, S.A. - Member of the Board of Directors of Hotel Ritz, SA. - Member of the Board of Directors of Sodim, SGPS, S.A.
6. Other professional activities in the last 5 years:
- Member of the Board of Directors of Abapor - Comércio e Indústria de Carnes, S.A. - Member of the Board of Directors of ECH – Exploração de Centrais Hidroeléctricas, S.A. - Chairman of the Board of Directors of ETSA - Empresa de Transformação de Subprodutos Animais S.A. - Member of the Board of Directors of ETSA, SGPS, S.A. - Member of the Board of Directors of I.T.S. - Indústria Transformadora de Subprodutos, S.A. - Member of the Board of Directors of Goliatur – Sociedade de Investimentos Imobiliários, S.A. - Member of the Board of Directors of Sebol - Comércio e Indústria de Sebo, S.A. - Member of the Board of Directors of Silonor, S.A. - Member of the Audit Board of Sodim, SGPS, S.A. - Member of the Board of Directors of Secilpar Inversiones, S.L. - Member of the Board of Directors of Tercim – Terminais de Cimento, S.A. - Member of the Board of Directors of Verdeoculto - Investimentos, SGPS, S.A. - Member of the Board of Directors of Sonaca SGPS, S.A.
Paulo Miguel Garcês Ventura
1. Type of directorship: Non-executive.
2. No. of shares held in company: holds no shares in company
3. Qualifications: Degree in law from the Faculty of Law, University of Lisbon (1994). Member of the Portuguese Bar Association. IEP Insead.
4. Date when first appointed and expiry of term of office: 2011 – 2014
5. Management office held in companies:
Companies in Portucel Group:
Consolidated Annual Report 2011 182
- Member of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A. - Member of the Board of Directors of Soporcel – Sociedade Portuguesa de Papel, S.A. - Member of the Board of Directors of About The Future - Empresa Produtora de Papel, S.A.
Other Companies / Entities:
- Member of the Board of Directors of Abapor - Comércio e Indústria de Carnes, S.A. - Member of the Board of Directors of Aprovechamiento Integral de Subprodutos Ibéricos, S.A. - Manager of Biological - Gestão de Resíduos Industriais, L.da. - Member of the Board of Directors of Celcimo, SL. - Manager of Cimentospar - Participações Sociais, SGPS, L.da. - Member of the Board of Directors of ETSA Investimentos, SGPS, S.A (formerly called VERDEOCULTO - Investimentos, SGPS, S.A) - Member of the Board of Directors of ETSA, SGPS, S.A. - Member of the Board of Directors of Great Earth - Projectos, S.A. - Member of the Board of Directors of I.T.S. - Indústria Transformadora de Subprodutos, S.A. - Member of the Board of Directors of Sebol - Comércio e Indústria de Sebo, S.A. - Member of the Board of Directors of Seinpart - Participações, SGPS, S.A. - Member of the Board of Directors of Semapa Inversiones, S.L. - Member of the Board of Directors of Seminv - Investimentos, SGPS, S.A.
6. Other professional activities in the last 5 years:
- Chairman of the General Meeting of Cimipar – Sociedade Gestora de Participações Sociais, S.A. - Chairman of the General Meeting of Cimo – Gestão de Participações, SGPS, S.A. - Member of the Board of ETSA - Empresa de Transformação de Subprodutos Animais S.A. - Chairman of the General Meeting of Imocipar – Imobiliária, S.A. - Chairman of the General Meeting of Goliatur – Sociedade de Investimentos Imobiliários, S.A. - Member of the Board of Goliatur – Sociedade de Investimentos Imobiliários, S.A. - Chairman of the General Meeting of Longapar, SGPS, S.A. - Vice -President of the General Meeting of REN – Redes Eléctricas Nacionais, SGPS, S.A. - Chairman of the General Meeting of Seinpart – Participações SGPS S.A. - Company Secretary of Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. - Chairman of the General Meeting of Seminv – Investimentos, SGPS, S.A. - Chairman of the General Meeting of Verdeoculto – Investimentos, SGPS, S.A.
Consolidated Annual Report 2011 183
Section III – General and Supervisory Board, Committee for Financial Affairs, Audit Committee and Audit Board 2.20. 2.21. Identification of the members of the Audit Board, declaring that members comply with the incompatibility rules provided for in article 414-A.1 and the independence criterion provided for in article 414.5, both of the Companies Code
Incompatibility Rules Independence Rules Complies Does not comply Complies Does not comply Miguel Camargo de Sousa Eiró X X Duarte Nuno d’Orey da Cunha X X Gonçalo Nuno Palha Gaio Picão Caldeira X X
2.22. Professional qualifications of the members of the Audit Board, professional activities over the last five years or more, the number of shares held in the company, date of first appointment and expiry of term of office. and 2.23. Office held by members of the Audit Board in other companies, indicating that held in other companies of the same group
Miguel Camargo de Sousa Eiró
1. Qualifications: Degree in law, University of Lisbon (1971).
2. No. of shares held in company: holds no shares in company.
3. Date when first appointed and expiry of term of office: 2007 – 2014
4. Holds no office in other Portucel Group companies
5. Management office held in other companies:
- Chairman of the Audit Board of Semapa – Sociedade de Investimento e Gestão, SGPS, S.A.
6. Other professional activities in the last 5 years:
- Full Member of the Audit Board of Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. - Legal practice
Consolidated Annual Report 2011 184
Duarte Nuno d’Orey da Cunha
1. Qualifications: Degree in financial affairs, ISCEF (1965)
2. No. of shares held in company: 16,000 shares
3. Date when first appointed and expiry of term of office: 2007 – 2014
7. Holds no office in other Portucel Group companies
4. Management office held in other companies:
- Member of the Audit Board of Semapa – Sociedade de Investimento e Gestão, SGPS, S.A. - Member of the Board of Directors of Vértice – Gestão de Participações, SGPS, SA - Chairman of the General Meeting of Cimipar – Sociedade Gestora de Participações Sociais, SA.
5. Other professional activities in the last 5 years:
- Member of the Board of Directors of Beira-Rio – Sociedade Construtora de Armazéns, SA - Advisor to the Board of Directors of Cimilonga – Imobiliária SA - Member of the Board of Directors of Longavia – Imobiliária, SA. - Member of the Board of Directors of Sonagi SGPS, SA - Chairman of the Audit Board of Semapa – Sociedade de Investimento e Gestão SGPS, SA - Chairman of the Audit Board of Portucel – Empresa Produtora de Pasta e Papel S.A. - Member of the Board of Directors of Sociedade Agrícola da Quinta da Vialonga, SA - Chairman of the General Meeting of Sonaca, SGPS, SA
Gonçalo Nuno Palha Gaio Picão Caldeira
1. Qualifications: Degree in law, Portuguese Catholic University, Lisbon (1990); Concluded professional traineeship at the Lisbon District Council of the Bar Association (1991); Master of Business Administration (MBA), Universidade Nova de Lisboa (1996); Attended postgraduate course in real estate management and valuation, ISEG (2004)
2. No. of shares held in company: holds no shares in company.
3. Date when first appointed and expiry of term of office: 2007 - 2014.
Consolidated Annual Report 2011 185
4. Holds no office in other Portucel Group companies
5. Management office held in other companies:
- Member of the Audit Board of Semapa – Sociedade de Investimento e Gestão, SGPS, S.A.. - Manager of Loftmania – Gestão Imobiliária, Lda. (2008-2009) - Manager of LINHA DO HORIZONTE – Investimentos Imobiliários, Lda
6. In addition to the positions indicated in the preceding item, no other office held in the last 5 years.
The annual report issued by the Audit Board on its work during the year is published in conjunction with the Report & Accounts, and is available at the Group’s website.
2.24. Reference to the fact that the audit board conducts an annual assessment of the external auditor and to the possibility of it proposing to the general meeting the auditor’s dismissal with due cause.
The choice of external auditor and the remuneration fixed for its services are validated in advance by the Audit Board.
In addition to aspects relating to the choice and remuneration of the external auditor, it should be noted that the Audit Board held joint meetings with the external auditor over the course of the year, and the two bodies are in constant and direct contact.
In the exercise of its supervisory duties, the Audit Board can also assess the work of the external auditor, and it has the possibility of proposing its dismissal with due cause to the General Meeting, provided the legal rules are observed on the submittal of motions.
The audit firm, in this case PriceWaterhouseCoopers, rotated the external auditor (the partner responsible for the auditing the Company’s affairs) with effect as from 2010, and the previous auditor complied with the maximum period established in the recommendation. It was also the understanding of Portucel’s Audit Board, supported by last year’s annual general meeting, that the recommendation on the rotation of the auditor is adopted, as it has considered that the quality of work performed by the existing audit firm and its accrued experience in Portucel outweigh any possible drawbacks in retaining this firm.
Consolidated Annual Report 2011 186
2.25 to 2.29 – not applicable
Section V – Remuneration
2.30. Description of the remuneration policy for members of the management and supervisory bodies as referred to in Article 2 of Law no. 28/2009, of 19 June.
The policy on remuneration of members of the management and supervisory bodies is described in annex IV.
2.31. Indication of the annual remuneration earned individually by members of the company’s management and supervisory bodies, including fixed and variable remuneration and, with regard to the latter, indication of the different component parts, the portion which is deferred and the portion already paid. Remuneration: Board of Directors
(amount in euros) Net Income Social Gross Fixed Variable tax Security Pedro Queiroz Pereira 1.143.592 392.216 0 1.798.490 798.490 1.000.000 Portucel 0 00 0 0 0 Group companies 1.143.592 654.898 0 1.798.490 798.490 1.000.000 José Honório 907.715 392.216 0 1.425.895 966.896 458.999 Portucel 163.115 85.133 0 248.248 248.248 0 Group companies 744.600 433.047 0 1.177.647 718.648 458.999 Manuel Regalado 741.654 392.216 0 1.188.931 342.589 846.342 Portucel 541.749 333.225 0 874.974 264.138 610.836 Group companies 199.905 114.052 0 313.957 78.451 235.506 Adriano Silveira 541.678 392.216 0 873.434 297.747 575.687 Portucel 356.926 218.761 0 575.687 0 575.687 Group companies 184.752 106.446 6.549 297.747 297.747 0 António Redondo 543.332 392.216 0 873.619 297.747 575.872 Portucel 357.117 218.755 0 575.872 0 575.872 Group companies 186.215 104.982 6.550 297.747 297.747 0 Fernando Araújo 534.702 392.216 0 873.411 297.754 575.657 Portucel 356.908 218.749 0 575.657 0 575.657 Group companies 177.794 113.410 6.550 297.754 297.754 0 Luís Deslandes 134.881 392.216 0 231.970 151.970 80.000 Portucel 134.881 85.625 11.464 231.970 151.970 80.000 Group companies 0 0 0 0 0 0 Manuel Gil Mata 121.311 392.216 0 205.174 125.174 80.000 Portucel 121.311 74.475 9.388 205.174 125.174 80.000 Group companies 0 0 0 0 0 0 Francisco Nobre Guedes 90.138 392.216 0 131.484 71.484 60.000 Portucel 90.138 41.346 0 131.484 71.484 60.000 Group companies 0 0 0 0 0 0 Total 4.759.002 3.529.944 0 7.602.407 3.349.850 4.252.557
Consolidated Annual Report 2011 187
Remuneration of the Audit Board Fixed Variable
(amounts in euros) Remuneration Remuneration Total
Duarte da Cunha 16.509 0 16.509 Miguel Eiró 17.805 0 17.805 Gonçalo Caldeira 14.294 0 14.294
Total 48.608 48.608
As stated in chapter 0.3 of this report, the Company does not defer payment of a significant portion of the variable income, and the amounts indicated in these tables were effectively paid in 2011 to the members of the Board of Directors and the Audit Board.
The amounts previously presented in relation to the fixed remuneration earned by the Board of Directors differ from those disclosed in nos. 6 and 7 of the Notes to the Financial Statements, and are reconciled as follows:
Note 6 Note 7 2011 (amounts in euros) 2011 Fixed Variable (amounts in euros) Remuneration Remuneration Board of Directors
Board of Directors 0 4,252,557 Portucel SA 3,074,103 Corporate bodies of other Group Amount imputed to 2010 -4,252,557 companies 162,710 Imputation of amounts External auditor 374,696 payable in 2012 4,418,451 Net change in estimate for Audit Board 48,608 remuneration payable 3,349,850 Officers of the General Meeting 12,750 3,349,850 4,418,451 3,672,866
2.32. Information on how remuneration is structured in order to align the interests of members of the management body with the long term interests of the company, and on how it is based on performance assessment and discourages excessive risk-taking.
In addition to the details supplied in the text of the remuneration policy contained in Annex IV, it should be noted that the stability of the shareholder structure and of the composition of the Company’s board of directors means that the interests of these officers are clearly compatible with those of the Company, as may be seen from a comparative analysis of the results presented in recent years and the remuneration paid.
Consolidated Annual Report 2011 188
2.33. In relation to the remuneration of executive directors: a. Reference to the fact that the remuneration of executive directors includes a variable component and information on how this component depends on a performance assessment; b. Indication of the company bodies empowered to assess the performance of executive directors; c. Indication of the pre-set criteria for assessing the performance of executive directors; d. Specification of the proportion of directors’ pay represented by variable and fixed components, and indication of upper limits for both components; e. Information on deferred payment of the variable component of remuneration, indicating the deferral period. f. Details of how payment of variable remuneration is subject to the company’s continued positive performance over the deferral period; g. Sufficient information on the criteria applied in allocating variable remuneration in shares and on the continued holding by executive directors of the shares in the company acquired in this manner, on any contracts concluded with regard to these shares, specifically hedging or transferring risk, the respective limits and the respective proportion represented of total annual remuneration;
With regard to sub-paragraphs a, b, and c, the text on the remuneration policy contained in Annex IV provides a direct response on these issues.
With regard to sub-paragraph d), there are no upper limits on either the variable or fixed components of remuneration.
On the issue of deferring remuneration and making it conditional on positive performance by the company over the deferral period, no such measure has been adopted for the reasons set out above and there are no pre-set rules whereby payment of variable remuneration is conditional on the continued positive performance of the company.
There are no rights to shares or share options, and the criteria underlying the variable components of directors’ pay are those set out in the remuneration policy contained in Annex IV. The Company operates no share or option scheme, or any other share-based incentive scheme.
h. Sufficient information on the criteria applied in allocating variable remuneration in options and indication of the deferral period and the price for exercising options;
Not applicable, given that variable remuneration does not take the form of options.
Consolidated Annual Report 2011 133
i. Identification of the main parameters and grounds for any annual bonus system and any other non-cash benefits;
The main parameters for granting annual bonuses are based on the Company’s annual results, combined with the merit and performance assessment of each particular director..
There are no non-cash benefits.
j. Remuneration paid in the form of profit sharing and/or payment of bonuses, and the grounds on which these bonuses and/or profit sharing were granted;
There is no remuneration in the Company in the form of profit sharing. With regard to the payment of bonuses, the Remuneration policy set out in Annex IV establishes the criteria used for paying variable remuneration.
l. Compensation paid or owing to former executive directors in relation to termination of their directorships during the period;
The situation in question has never arisen in the Company, and when it does the legal rules will apply.
m. Reference to contractual limits on severance pay for director, and the respective relationship with the variable remuneration component;
The Company has no contractual limitation on compensation payable for unfair dismissal of a director.
n. Sums paid on any grounds by controlled or controlling companies or companies belonging to the same group; The information on remuneration paid in item 2.31 includes a breakdown of total remuneration paid by controlled or controlling companies.
o. Description of the main features of complementary or early retirement schemes for directors, indicating whether they have been assessed by the general meeting;
There are no early retirement arrangements for directors.
Complementary retirement and survivor’s pension schemes in force in the company are described in detail in no. 27 of the Notes to the Consolidated Financial Statements, which are part of the Report and Accounts subject to approval by the General Meeting. At 31 December 2011, the value of liabilities allocated to post-employment
Consolidated Annual Report 2011 134
benefits plans for give directors of the Portucel Group stood at 4,629,594 € (31 December 2010: 4,571,507€) breaking down individually as follows:
Liablities at 31-12- Beneficiary 2011 (amount in Euros) Adriano Augusto da Silva Silveira 721,169 António José Pereira Redondo 338,238 Luís Alberto Caldeira Deslandes 1,922,088 Manuel Maria Pimenta Gil Mata 991,096 Manuel Soares Ferreira Regalado 657,002
Total 4,629,594
p. Estimated value of relevant non-cash benefits considered as remuneration and not included in the foregoing.
No non-cash benefits which may be regarded as remuneration are assigned to any director.
q. Arrangements which prevent executive directors from entering into contracts which undermine the rationale of variable remuneration.
There are no arrangements preventing executive directors from entering into contracts which undermine the rational of their variable remuneration, nor can the Company envisage circumstances in which such arrangements might be instituted.
2.34. Reference to the fact that the remuneration of non-executive members of the management body does not include variable components.
As stated above, the remuneration of non-executive directors can include a variable component which, although unrelated to the performance of the Company, is directly related to occasional contributions made on matters deemed to concern the strategic development of the Company and the related Group.
2.35. Information on the policy adopted in the company on whistleblowing (reporting channels, persons entitled to receive reports, required treatment of such reports and indication of persons and bodies with access to the information and their respective involvement in the procedure).
Consolidated Annual Report 2011 135
The Company has “Regulations on the Reporting of Irregularities”, governing the reporting by Company employees of any irregularities allegedly committed within the company.
These regulations lay down the general duty to report alleged irregularities, requiring that such reports be made to the Audit Board and also providing for an alternative solution in the event of a conflict of interests on the part of the Audit Board with regard to the report in question.
The Audit Board, which may be assisted for these purposes by the Internal Control Committee, shall investigate all facts necessary for assessment of the alleged irregularity. This process ends with the report being filed or else submission to the Board of Directors or the Executive Board, depending on whether a company officer is implicated or not, of a proposal for application of the measures most appropriate in the light of the irregularity in question.
The regulations also contain other provisions, namely designed to safeguard the confidentiality of communications, non-prejudicial treatment of employees making reports and dissemination of the respective rules in the Company.
No irregular situation was reported in the course of 2011.
Consolidated Annual Report 2011 136
Section V – Specialist Committees
Powers and responsibilities of specialist committees in the Company:
Internal Control Committee
The Internal Control Committee is responsible for assessing any irregularity within the company; an irregularity is deemed to comprise any alleged breach occurring within the company of the rules established in law, regulations or the articles of association, together with failure to comply with the duties and ethical principles set out in the Code of Ethics, contained in Annex I. The Internal Control Committee is also responsible for detecting and controlling all relevant risks in the company’s activities, namely financial, property and environmental risks.
More specifically, the Internal Control Committee has the following responsibilities: a) To assess the procedures for the control of financial information (accounts and reports) disclosed, and the reporting calendar, and shall, specifically, review the Group’s annual, half-yearly and quarterly accounts for publication and report on the same to the Board of Directors prior to the latter approving and signing such accounts; b) To advise the Board of Directors on the choice of External Auditor and pronounce on the scope of the Internal Auditor’s activities; c) To discuss and examine the annual reports with the External Auditor, advising the Board of Directors on any measures to be taken.
In the course of its duties, the Internal Control Committee shall take heed of facts such as changes in accounting policies and practices, significant adjustments due to the auditor’s intervention, progress in the relevant financial ratios and any changes in the Group’s formal or informal rating, significant exposures in financial management (such as currency, interest rate or derivatives risks) and illegal or irregular procedures.
Corporate Governance Control Committee
The Corporate Governance Control Committee oversees application of the Company’s corporate governance rules and the Code of Ethics, with the following particular responsibilities: i) Assist the Board of Directors when so required by the same, assessing and submitting to it proposals for strategic guidelines in the field of corporate responsibility; ii) Monitor and oversee, on a permanent basis, matters relating to corporate governance and social, environmental and ethical responsibility, the sustainability of the PSg’s business,, the Internal Codes of Ethics, the systems for assessment and resolution of conflicts of interests, notably with regard to relations between the company and its shareholders or other stakeholders
Consolidated Annual Report 2011 137
In the exercise of its responsibilities, the Corporate Governance Control Committee is required in particular: a) To submit to the Board of Directors the corporate governance policy to be adopted by the Company and the PSg; b) To monitor, review and assess the adequacy of the Company’s governance model and its consistency with national and international recommendations, standards and best practice in the field of corporate governance, addressing to the Board of Directors the recommendations it sees fit to this end; c) To propose and submit to the Board of Directors changes to the Company’s corporate governance model, including to the organizational structure, workings, responsibilities and rules of procedure of the Board of Directors; d) To monitor the Company’s corporate links with the organizational structure of the other companies in the Portucel Group; e) To oversee compliance with and the correct application of the principles and rules relating to corporate governance contained in law, regulations and the articles of association, in coordination with the activities of the Board of Directors, the Executive Board, the Official Auditor and the External Auditor, sharing and requesting the exchange of information necessary for this purpose; f) To define the parameters of the Company’s governance report to be included in its annual Report and Accounts; g) To monitor the work of the Ethics Committee and the activities of the departments of Portucel Group companies relating to matters within the scope of its responsibilities; h) To monitor on an ongoing basis, assess and supervise internal procedures relating to conflict of interests issues, and also the effectiveness of the systems for assessment and resolution of conflicts of interests; i) To pronounce on transactions between the Company and its Directors, and also between the Company and its shareholders, whenever materially relevant; j) Whenever so requested by the Board of Directors, to issue opinions on the application to the Company’s officers of the rules on incompatibility and independence; k) To further and strengthen the operation of the Company as a sustainable undertaking, gaining it recognition for this, both internally and externally; l) To ensure compliance, by the members of the Board of Directors and other persons concerned, of the securities market rules applicable to their conduct; m) To develop a transversal strategy of corporate sustainability, integrated into and consistent with the Company’s strategy; n) To promote, develop and supervise the internal measures required for the Company to achieve sustained growth, as regards the business, environmental and social aspects of its operations; o) To prepare and follow through decision-making by company bodies and committees on matters relating to corporate governance and sustainability or which give rise to conflicts of interests between the Company, shareholders and the company officers;
Consolidated Annual Report 2011 138
p) To follow through inspections conducted by the Securities Market Commission (CMVM) in relation to corporate governance issues.
Sustainability Committee
The Sustainability Committee is responsible for formulating corporate and strategic policy on issues of social and environmental responsibility, and is responsible for drawing up a bi-annual sustainability report.
Pension Fund Supervisory Committee
The Pension Fund Supervisory Committee was set up during 2009 in order to monitor compliance with the pension plan and the management of the respective pension fund. The committee consists of three representatives of the company and two representatives of the fund’s beneficiaries, designated by the Workers’ Committee. The committee’s responsibilities include checking compliance with the rules applicable to the pension plan and to management of the respective pension fund, pronouncing on proposals for transferring management and other significant changes in the contractual arrangements for the fund and its management, and on the winding up of the fund or a section of the fund.
Property Risks Analysis and Monitoring Committee
The company has a Property Risks Analysis and Monitoring Committee which is coordinated by the director responsible for this area and comprises the Plant managers, the Financial Director and the Internal Audit Director. The committee meets as and when required, and its main task is to pronounce on the systems in place in the company for safeguarding against property risks, in particular measures taken to comply with recommendations issued in the light of inspections by reinsurers, and on the adequacy of the insurance taken out by the Group, in terms of scope, type and value of cover.
Ethics Committee
Following on from the drafting and approval of the Ethics Code by the Executive Board in the course of 2010, an Ethics Committee has been established, to issue an annual report on compliance with the provisions of the new code. This report will detail all irregularities which the Committee has detected, and the findings and follow-up proposals emerging from the various cases examined. This report is included in Annex V to this Corporate Governance Report.
The Ethics Committee is required to monitor, impartially and independently, the conduct of the Company’s bodies and officers as regards disclosure and compliance with the Code of Ethics in all companies in the Portucel Group. In the course of its duties, the Ethics Committee has the following particular responsibilities:
Consolidated Annual Report 2011 139
a) To ensure that an adequate system exists for monitoring internally compliance with the Code of Ethics, and specifically to assess the recommendations resulting from these monitoring activities; b) To assess issues submitted to it by the Board of Directors, the Executive Committee and the Audit Board in connection with compliance with the Portucel Code of Ethics, and also to consider, in abstract terms, issues raised by any member of staff, customer or business partner (“Stakeholders”); c) To appraise and assess any situation which arises in relation to compliance with the requirements of the Code of Ethics involving any company officer; d) To submit to the Corporate Governance Committee the adoption of any measures it deems fit in this connection, including the review of internal procedures, together with proposals for amendment of the Portucel Code of Ethics; e) To draw up an annual report, concerning compliance with the requirements of the Code of Ethics, detailing any irregularities of which it is aware, together with the conclusions and proposals adopted in the cases considered.
The Ethics Committee also functions as an advisory body to the Board of Directors in respect of matters concerning the application and interpretation of the Code of Ethics.
2.36. Identification of the members of the committees set up to assess the individual and collective performance of executive directors, to reflect on the governance system adopted by the company and to identify potential candidates with the right profile for directorships.
The overall performance of the executive directors is assessed by the non-executive members of the Board of Directors, and the individual assessments are subject to an appraisal by the Remuneration Committee. The Corporate Governance Committee has conducted an assessment of the form of governance adopted by the Company, and of the degree of compliance with standards of good practice and governance rules in force. The selection of suitable candidates for directorships is regarded as the sole province of the shareholders.
Number of meetings of committees with management and supervisory responsibilities during the period in question, with reference to the taking of minutes of these meetings.
Body Number of meetings in 2011 Remuneration Committee 3 Corporate Governance Committee 3 Sustainability Committee 6 Internal Control Committee 3 Environmental Board 3 Pension Fund Supervisory Board 2
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All these specialist committees within the Company keep minutes of the meetings held during the year.
2.37. Reference to the fact that one member of the Remuneration Committee has knowledge and experience in the field of remuneration policy.
All the members of the Remuneration Committee have wide experience and knowledge concerning matters relating to the remuneration of company officers, in view of the offices held in the course of their professional careers. Special attention is drawn to the fact that the Chairman of the committee is the representative of Egon Zehnder, a multinational specializing in human resources, and especially senior management recruitment.
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2.38. Reference to the independence in relation to the board of directors of individuals or entities contracted to sit on the remuneration committee by employment or service contract and, when applicable to the fact that such persons have current relationships with the company’s consultants.
The members of the Remuneration Committee have no contractual relationship with the Company, and are wholly independent of the Board of Directors, although Egon Zehnder occasionally provides consultancy services to the Company in the field of management recruitment.
2.39. Composition of the remuneration committee or equivalent body, if any, identifying the respective members who are also directors, together with their spouses, relatives and kin in the direct line to the 3rd degree, inclusive The composition of the Remuneration Committee:
Chairman: José Gonçalo Maury, representing Egon Zehnder
Members: João Rodrigo Appleton Moreira Rato Frederico José da Cunha Mendonça e Meneses
No member of this committee or any of their spouses, relatives or in-laws, in the direct line, to the third degree, is a member of the company’s management body.
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Chapter III – Information and Auditing
3.1. Capital structure, including indication of shares not admitted for trading, different categories of shares, rights and duties attached to the same, and the percentage of the capital represented by any such category.
Portucel’s share capital is represented solely by ordinary shares, with a nominal value of 1 euro each, the same rights and duties being attached to all shares.
The share capital consists of a total of 767,500,000 shares, corresponding to an equal total nominal value in euros with all shares currently admitted for trading.
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3.2. Qualifying holdings in the issuer’s share capital, calculated in accordance with Article 20 of the Securities Code.
% of capital and voting % of non-suspended Entity Nº Shares rights voting rights
Semapa SGPS SA 582,172,407 75.85% 78.10%
Semapa - Soc. de Investimento e Gestão, SGPS, S.A. 340,571,392 44.37% 45.69% Seinpar Investments B.V. 241,583,015 31.48% 32.41% Seminv - Investimentos, SGPS, S.A. 1,000 0.00% 0.00% Cimentospar - Participações Sociais, SGPS, L.da 1,000 0.00% 0.00% Duarte Nuno d'Orey da Cunha (*) 16,000 0.00% 0.00%
Bestinver Gestión, S.A. SGIIC 15,407,418 2.01% 2.07%
Bestinver Bolsa, F.I. 5,532,650 0.72% 0.74% Bestinfond, F.I. 4,775,869 0.62% 0.64% Bestinver Global, FP 1,268,711 0.17% 0.17% Bestinver Mixto, F.I, 906,989 0.12% 0.12% Soixa Sicav 855,721 0.11% 0.11% Bestinver Bestvalue SICAV 757,838 0.10% 0.10% Bestinver Ahorro, FP 751,543 0.10% 0.10% Texrenta Inversiones, SICAV 234,336 0.03% 0.03% Bestinver Value Investor SICAV 207,049 0.03% 0.03% Divalsa de Inversiones, SICAV, SA 38,893 0.01% 0.01% Bestinver Empleo FP 34,924 0.00% 0.00% Linker Inversiones, SICAV, SA 23,776 0.00% 0.00% Sumeque Capital, SICAV 15,508 0.00% 0.00% Bestinver Empleo II, FP 1,987 0.00% 0.00% Bestvalue, FI 1,624 0.00% 0.00%
(*) Officer in Portucel
As at 31/12/2011, Portucel held (indirectly through subsidiaries) 22,111,382 own shares, corresponding to 2.88% of the share capital.
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3.3. Identification of shareholders with special rights, and description of such rights.
No shareholders or categories of shareholders in Portucel have special rights.
3.4. Any restrictions on the transferability of shares, such as consent clauses for disposal, or limitations on ownership of shares.
Portucel has no restrictions of any kind on the transferability or ownership of its shares.
3.5. Shareholders’ Agreements known to the company or which might lead to restrictions on the transfer of securities or voting rights
The company is not aware of the existence of any shareholders’ agreement which might lead to restrictions on the transfer of securities or voting rights.
3.6. Rules applicable to amendment of the articles of association;
Portucel has no special rules on the amendment of its articles of association. The general rules deriving from the Companies Code therefore apply to these issues.
3.7. Control mechanisms in an employee ownership scheme insofar as voting rights are not directly exercised by employees.
There is no employee ownership scheme in Portucel.
3.8. Description of evolution in the issuer’s share price, taking into account:
a) The issuing of shares or other securities entitling the holder to subscribe or acquire shares; b) Announcement of results; c) Payments of dividends for each category of share, indicating the net dividend per share.
The performance of the capital markets over the course of 2011 reflected the serious financial crisis affecting the Euro Zone, causing significant instability on European stock exchanges. The principal markets recorded significant losses, with the Paris, London and Madrid main share indexes down by 17%, 15.5% and 13.1% respectively. The Portuguese stock exchange was particularly hard hit, with the PSI20 index ending the year down by 27.6%.
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In this economic environment, and in a situation of unfavourable paper consumption, companies in the industry were particularly affected, ending the year with substantially lower share prices. The HX Paper & Forest index recorded an accrued drop from the start of the year of approximately 37%, with shares in Scandinavian companies presenting severe losses. Pulp producers in Latin American also presented negative performance overall, with only a few North American producers recording an increase in share price.
Against this background, the performance of Portucel shares in 2011, albeit negative, compares favourably with that of its European competitors. Portucel shares ended the year at 1.84 euros, down on the year by a total of 19.2%. The peak closing price in 2011 was 2.57 €/share, recorded on 17 February, with a low of 1.70 €/share recorded on 21 November. Average monthly trading in Portucel shares in 2011 stood at approximately 10 million. At year end, treasury stock stood at approximately 22.1 million, corresponding to 2.88% of the share capital.
The following graph shows the listed share price, identifying the dates of publication of results, the General Meeting and distribution of dividends.
€/ share Listed Price of Portucel shares in 2011
3.0 2.9 31/01/2011 19/05/2011 Disclosure of 2010 Annual General 20/ 07/2011 2.8 results Meeting Disclosure of 1st 20/10 half results Disclosure of 3rd 2.7 quarter results 2.6 2011 2.5 2.4 2.3 2.2 2.1 2.0 20/04/2011 1.9 Disclosure of 1st 1.8 quarter results 2011 1.7 1.6 1.5
31-12-10 26-01-11 21-02-11 19-03-11 14-04-11 10-05-11 05-06-11 01-07-11 27-07-11 22-08-11 17-09-11 13-10-11 08-11-11 04-12-11 30-12-11
Dividends were not distributed in 2011. No shares or other securities were issued during 2011.
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Dividends for the financial year of 2009 were payable as from 14 April 2010. The gross dividend per share was 0.0825 €.
3.9. Description of the dividend distribution policy adopted by the company, including the dividend per share distributed during the last three periods.
Powers to propose dividends lie with the Board of Directors of Portucel, subject to the legislation in force and the articles of association. Under the articles of association, as amended by the general meeting of 14.04.2007, the general meeting resolves on the amount to be distributed in dividends, by simple majority of votes.
In the last three financial years, the following dividends were distributed per share in circulation: 2009 (for the financial year of 2008) 0.1050 € per share 2010 (for the financial year of 2009) 0.0825 € per share
Analysis of the dividends for the financial year of 2010 should take into consideration payment of reserves of 0.1564 € per share, in December of the same year.
3.10. A description of the main characteristics of the share and share option plans adopted or valid for the financial year in question, the reason for adopting said scheme and details of the category and number of persons included in the scheme, share-assignment conditions, non-transfer of shares clauses, criteria on share-pricing and the exercising option price, the period during which the options may be exercised, the characteristics of the shares to be distributed, the existence of incentives to purchase and/or exercise options, and the responsibilities of the Board of Directors for executing and/or changing the plan.
Details shall also include the following:
a) The number of shares required for exercise of the options allocated and the number of shares required for the exercise of the exercisable options at the start and end of the year in question; b) The number of options allotted, exercisable and expired during the year; c) The general meetings’ appraisal of the plans adopted or in force during the period in question.
There are no share or share option plans in force in the company.
3.11. Description of the main transactions and operations carried out between the company and the members of the management and supervisory body, the owners of qualifying holdings or controlled,
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controlling or group companies, when economically significant for any of the parties involved, except for those transactions or operations that are carried out on an arms-length basis and form part of the company’s normal business.
There are no transactions or operations which are economically significant to any of the parties involved.
3.12 Outline essential details of transactions and operations carried out between the company and holders of qualifying holdings or any related entities, under Article 20 of the Securities Code, not on an arm’s length basis.
All the company’s transactions with third parties, be they shareholders owning qualifying holdings or entities in any way related to them, were carried out on an arm’s length basis.
3.13. Description of the procedures and criteria applicable to intervention by the supervisory body for the purposes of prior assessment of transactions to be carried out between the company and holders of qualifying holdings or related entities, under Article 20 of the Securities Code.
No transactions of significant importance as referred to above have taken place involving the Company. However, were they to occur, it would fall to the Audit Board to analyze the situations and issue its opinion, this duty being expressly established in its rules of procedure.
The Audit Board also received periodic reports from the external auditor in which, in the course of its duties, the auditor checks the application of remuneration policies and systems and the effectiveness and workings of internal control arrangements, reporting any shortcomings detected.
3.14. Description of statistical data (number, average and maximum values) relating to transactions subject to prior intervention by the supervisory body.
The Company has not undertaken transactions requiring the prior intervention of the Audit Board, despite this board’s extensive knowledge of the company’s affairs; however, were it to be justifies, the Audit Board would study the situation and issue its opinion, as is expressly established in its rules of procedure.
3.15. Reference to the existence of an Investor Support Office or other similar service:
Portucel has had an Investor Support Office since November 1995, set up with a view to handling contact, on a permanent and appropriate basis, with the financial community – investors, shareholders, analysts and
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regulatory authorities – and to publish the company’s financial reports and any other information of relevance to its stock market performance, in keeping with principles of coherence, regularity, fairness, credibility and opportunity.
All mandatory disclosures, such as information on the company name, its status as a public company, registered offices and other details required by Article 171 of the Companies Code, are available at the Group’s website, at www.portucelsoporcel.com. Also available on the Portucel website, in Portuguese and English, are disclosures of quarterly results, half-yearly and annual reports and accounts, together with the respective press releases, list of company officers, the financial calendar, the articles of association, notices of general meetings, and all motions tabled for discussion and vote at general meetings, resolutions approved and statistics relating to attendance, together with relevant developments.
Portucel’s Market Relations Officer is Joana de Avelar Pedrosa Rosa Lã Appleton who may be contacted by telephone (265 700 566) or by email ([email protected]); these contact details are supplied on Portucel’s website, in the investors’ section.
3.16. Indication of annual remuneration paid to the auditor or other individuals or entities belonging to the same network and borne by the company and/or by controlled, controlling or group entities and details of the percentage relating to such services:
In the financial year ended 31 December 2011, expenditure on legal auditing of accounts, audits and fiscal consultancy totalled 814,133 euros, breaking down as follows:
Amount in Euros 2011 %
Audit Services Legal audit of accounts 374,696 46% Financial audit of foreign subsidiaries 177,728 22% Financial consultancy In Portugal 85,602 11% In foreign subsidiaries 107,753 13% Other reliability assurance services 68,354 8% 814,133 100%
Legal auditing services include financial audits of the Groups subsidiaries and foreign companies; these totalled 177,728 Euros. The services described as fiscal consultancy and others consist essentially of supporting services to assure compliance with fiscal obligations, in Portugal and abroad, and also surveys of situations in relation to operational business processes, which resulted in no consultancy on the redesign of existing practices, procedures or controls. It should be noted that the amount paid for fiscal consultancy services, 60,673
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euros, relate to a success fee for a process relating to reclaiming tax unduly deducted at source on dividends distributed in a foreign subsidiary, between 2001 and 2004 and which therefore relate to services rendered up to 2005, but whose results only materialized in the reporting period.
The vast majority of services indicated as “other reliability assurance services” relate to the issuing of opinions on request for reimburse of expenses under contracts with AICEP and compliance with financial ratios; the Company is required to obtain these opinions under contracts it has signed, and not because of service requested with any other purpose.
The Board of Directors considers that there are sufficient procedures to safeguard the independence of auditors through the analysis conducted by the Audit Board and the Internal Control Committee of the proposed work and the careful specification of this work when the auditors are contracted.
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ANNEX I CODE OF ETHICS
1. General Aims and Values 1.1 The Code of Ethics as foundation of the Portucel Group’s culture The pursuit of the aims set out in this Code of Ethics, respect for its values and compliance with its rules of conduct together form the professional ethos of the Portucel business universe. The Code shall be distributed to investors, clients, suppliers, regulatory authorities, competitors and representatives of the communities with which the group deals, and shall govern the professional conduct of all those working in the Group’s companies and other organizations.
The Code of Ethics is to be viewed as setting standards of conduct, which Portucel Group and all those working and interacting with it should follow and respect. It should accordingly be interpreted as a benchmark for behaviour, applying beyond the specific reach of its clauses.
Portucel Group will assure that the Code of Ethics is made available to all its staff and arrange for specific training in this field, at all levels, in order to assure that the Code is disseminated, generally understood and mandatorily put into practice. It will also make permanent arrangements for direct and confidential communication, through the Board of Directors, allowing any member of Portucel Group staff to clarify the interpretation of the Code, to resolve any queries and make good any lacunae which may arise in its application.
An Ethics Committee is also set up, comprising three independent members of good standing, appointed for this purpose by the Board of Directors.
The Ethics Committee is the body responsible for appraising and assessing any situation which may arise in relation to compliance with the rules established in this Code involving any Board member, and shall also advise the Board of Directors on matters relating to application and interpretation of this Code.
1.2 Fundamental aims The fundamental aims pursued by Portucel Group are based on creating value and an appropriate level of return for investors, by offering the highest standards of quality in the supply of goods and services to clients, through the recruitment, motivation and development of the most able and highly skilled professionals, within a meritocratic culture permitting its employees to enjoy personal and professional development and the Group to position itself at the forefront of the markets in which it operates,
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maintaining a policy of sustainable management of natural resources, mitigation of environmental impacts and fostering of social development in the areas in which it carries on its business operations.
1.3 Values The principles and rules of conduct of the Code of Ethics derive from values regarded as fundamental for Portucel Group, which should be pursued on an ongoing basis in the course of its business, and in particular: • in protecting the interests and rights of shareholders and safeguarding and increasing the value of assets belonging to Portucel Group; • in the good governance of Group companies; • in scrupulous compliance with the requirements of the law, the articles of association and regulations applicable to Portucel Group’s operations and companies; • in the observance of duties of loyalty and confidentiality, and in assuring the principle of the professional accountability of the staff in the exercise of their respective duties; • in the resolution of conflicts of interests and the application to staff of scrupulous and transparent rules in situations involving business transactions; • in observance by institutions and individuals of the highest standards of integrity, loyalty and honesty, both in dealings with investors, suppliers, clients and regulators, and in interpersonal relations between members of Portucel Group staff; • in good faith in business dealings and scrupulous compliance with contractual obligations to clients and suppliers; • in strict compliance with the legislation in force on competition practices; • in recognizing equality of opportunity, individual merit and the need to respect and advance human dignity in professional relationships and business activities; • in guaranteeing safety and well-being at the workplace; • in the adoption of social responsibility principles and practices; • in the genuine and careful pursuit of sustainable development; • in promoting a permanent stance of dialogue with all stakeholders and respect for their principles and values.
2 Scope of application The Code of Ethics applies to all corporate officers and staff of the Portucel Group, notwithstanding other applicable legal or regulatory requirements.
For the purposes of this Code of Ethics, the following definitions shall apply: • Staff – all persons who work or render services, on a permanent or casual basis, to Portucel Group companies, including, namely, employees, service providers, agents and auditors;
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• Clients – individuals or organizations to which Portucel Group companies supply products or services; • Suppliers – individuals or organizations which supply products or services to Portucel Group companies; • Stakeholders – individuals or organizations with which Portucel Group companies deal in their business, institution or social activities, including shareholders, officers, staff, suppliers, business partners or members of the community with whom Portucel Group interacts.
The Code of Ethics accordingly describes the ethical and professional conduct expected by the Company in connection with the pursuit of its business activities and dealings with third parties, and is of instrumental importance to the business policy and culture followed and fostered by the Group.
The Board members, and in particular the Executive Directors, who in their daily conduct should set an example of ethical behaviour for the whole Group, are required to exercise special diligence in adopting, implementing and enforcing the rules contained in the Code.
The Ethics Committee has authority to oversee the conduct of the members of the corporate bodies, in relation to matters concerning application of the Code of Ethics.
3 Rules of Conduct 3.1 Legality 3.1.1. All Portucel Group’s activities shall be guided by strict compliance with the applicable rules deriving from law, the articles of association and regulations.
3.1.2. In its conduct Portucel Group shall cooperate at all times with the public authorities, and specifically with regulatory bodies, complying with requests made to it and adopting forms of behaviour which permit these authorities to exercise their powers.
3.2 Diligence and courtesy 3.2.1. Portucel Group shall strive to ensure that all clients are treated with professionalism, diligence and care, with Group staff responding in full to all enquiries and making every effort to support clients in reaching their decisions.
3.2.2. Portucel Group staff shall behave courteously and politely at all times and display due care and professionalism in their dealings with clients, suppliers and other stakeholders or any other person or organization, with any kind of dealings with the Company.
3.2.3 All of Portucel Group’s relationships shall be based on values of truth and transparency, and all staff shall conduct themselves in keeping with high standards of honesty and integrity.
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3.3 Integrity Bribery and other corrupt practices are prohibited, in all active and passive forms, through act or omission, or by creating or maintaining situations of favouritism or other irregularities, together with conduct such as may create expectations of favouritism in dealings with Portucel Group;
3.3.1. Portucel Group and its staff shall decline any gifts which may be considered or interpreted as attempts to influence the company or the member of staff. In the event of doubt, staff shall give written notice of these situations to their hierarchical superior or the Board of Directors.
3.3.2. If any staff member is approached with an attempt at corruption, he or she shall notify their hierarchical superior or the Board of Directors in writing, describing how they were approached and supplying all details regarded as essential for the relevant Portucel Group bodies, namely the respective Internal Audit service, to assess the situation and take action.
3.3.3. The Board of Directors shall notify the Ethics Committee in writing of all facts of which it learns under the terms of the preceding paragraph.
3.4 Secrecy 3.4.1.Members of staff shall assure the confidentiality of all information belonging to the Group, other staff, clients, suppliers or stakeholders, of which they may learn in the course of their duties, and shall only use this information in the interest of Portucel Group.
3.4.2. Portucel Group and its staff shall guarantee strict confidentiality in relation to all personal data belonging to staff, clients, suppliers, stakeholders or third parties, of which they learn solely through their work and business. This data is deemed to include information of a strategic nature concerning production methods, product and brand characteristics, IT data concerning clients, suppliers and of a personal nature, together with technical documentation relating to any project carried out or underway.
3.4.3 Staff shall maintain confidentiality, on the terms set out in the preceding paragraphs, even after cessation of their employment contracts with Portucel Group companies and irrespective of the cause of cessation, for a period of three years thereafter. The information subject to the duty of confidentiality shall not be used in order to prejudice Portucel Group companies and may only be disclosed to third parties when so required by law, provided the Board of Directors is notified in advance of such disclosure, in writing.
3.5. Accounting practices
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3.5.1. Portucel Group shall observe and comply strictly with generally accepted accounting principles and criteria.
3.5.2. Portucel Group shall arrange for auditing and other procedures to be conducted by independent bodies, to which it shall make available information detailing its economic, financial, social and environmental risks, and undertaking to apply the most appropriate measures to eliminate or mitigate the risks involved.
4 Rules on conduct in the workplace 4.1 Working atmosphere 4.1.1 Portucel Group shall actively promote courtesy, loyalty, civility and assertiveness in relations between staff members, fostering group feeling, with strict respect for individual rights and freedoms.
4.1.2 Portucel Group shall promote team spirit, the sharing of common goals and mutual help between staff.
4.1.3 Staff shall not seek to obtain personal advantages at their co-workers’ expense, and their conduct shall be guided by compliance with legal and contractual obligations and respect for their hierarchical superiors and other Portucel Group staff, behaving in a cordial and respectful manner, and avoiding any type of conduct which might undermine the image and reputation of other members of staff.
4.1.4 The health, safety and well-being of its staff is a priority for Portucel Group, and accordingly all staff shall seek to familiarize themselves and comply with the legislation in force and with internal rules and recommendations. Immediate notice must be given of any accident or hazard to health and safety in the workplace, in accordance with the said rules, and the necessary or advisable preventative measures shall be adopted.
4.2. Professional specialization and development 4.2.1 Portucel Group will advance the personal and professional development and specialization of its staff, promoting appropriate training activities.
4.2.2 Portucel Group will make every effort to assure its staff high levels of job satisfaction and self- realization, operating a fair and appropriate pay policy, and providing opportunities for personal and professional development over the course of careers, in keeping with criteria of merit and prevailing market conditions for equivalent situations, in accordance with the Performance Assessment System in place.
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4.2.3 For their part, Portucel Group staff shall make efforts to update their skills and to undergo training on an ongoing basis, in order to develop their knowledge and technical expertise and to improve the services rendered to PGs, clients and other stakeholders.
4.3. Equality of opportunities 4.3.1. Portucel Group recognizes that all citizens are equal, and guarantees compliance with conventions, treaties and other legislation protecting the universal and fundamental rights of citizens, operating within the framework of reference of the Portuguese Constitution, the United Nations Universal Declaration of Human Rights and the International Labour Organization.
4.3.2 Portucel Group shall assure equality of opportunities in recruitment, hiring and professional development, only valuing professional aspects and adopting the measures it sees fit to combat and prevent any form of discrimination or differentiated treatment on the basis of ethnic or social origin, religious beliefs, nationality, gender, marital status, sexual orientation or physical disability.
4.3.3 Portucel Group shall protect its staff against any type of insulting or other discriminatory behaviour, encouraging respect for human dignity as one of the underlying principles of the Group’s culture and policies.
4.3.4 Portucel Group will never employ child or forced labour, nor will it ever collude with such practices, adopting the measures deemed appropriate to combat such situations, namely by public denunciation whenever they come to its attention.
4.4. Transparency, honesty and integrity 4.4.1. The staff of Portucel Group will comply with the responsibilities assigned to them, even in adverse circumstances, in a professional and responsible manner, namely within the limits of risk tolerance defined for the Company and in keeping with the budgetary targets for the areas in which they work.
4.4.2. Portucel Group staff shall conduct themselves at all times so as to pursue the interests of the Company, and shall immediately notify their hierarchical superior of any situation which might give rise to a conflict of interests, namely if, in the course of their duties, they are called on to intervene in processes or decisions which directly or indirectly involve organizations, entities or persons with which they work or have worked, or to which they are connected by ties of kinship or friendship. In the event of any doubt as to their on impartiality, they shall notify their hierarchical superior.
4.4.3. Portucel Group staff undertake not to carry on any outside work, paid or unpaid, which might directly prejudice their professional performance or Portucel Group’s business or interests.
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4.4.4. Portucel Group staff shall immediately inform their superiors on learning of any conduct which might undermine compliance with the Code of Ethics and which is clearly contrary to the values championed herein.
4.4.5. Portucel Group staff shall make sensible and reasonable use of the working resources at their disposal, avoiding waste and undue use.
4.4.6. Portucel Group staff shall care for the Group’s property, and not behave wilfully or negligently in any manner which might undermine its state of repair.
5. Dealings with stakeholders and other entities 5.1. Dealings with shareholders 5.1.1. The primary aim of Portucel Group is an ongoing quest to create value for shareholders, supported by a commitment to standards of excellence in professional and business performance, in the exercise of social responsibility and the pursuit of sustainable development.
5.1.2. Shareholders shall be treated in strict compliance with the legal rules applicable to their relations with each other and with their companies, namely those contained in the Companies Code.
5.2.Dealings with clients, suppliers, service providers and third parties
5.2.1. Portucel Group shall assure that all the terms for sale of its products to clients are clearly defined, and Group companies and their staff shall assure scrupulous compliance with these terms.
5.2.2. The suppliers and providers of services to Portucel Group shall be selected on the basis of objective criteria, taking into consideration the terms proposed, guarantees effectively provided and overall optimization of advantages for the Group. One of the selection criteria shall be compliance, by these service providers and suppliers, with rules of conduct consistent with the principles laid down in this Code.
5.2.3. Portucel Group and its staff shall negotiate at all times in keeping with the principles of good faith and full compliance with all their obligations.
5.2.4. Portucel Group undertakes to monitor the ethical conduct of its suppliers and to adopt immediate and strict measures in cases where such conduct is questionable.
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5.3. Relationship with competitors The competition practices of Portucel Group companies shall comply strictly with the legislation in force, in keeping with market rules and criteria, and with a view to assuring fair competition,
5.4. Dealings with political movements and parties Dealings between Portucel Group and its staff, on the one hand, and political movements or parties, on the other, shall be conducted in compliance with the legal rules in force, and in the course of these dealings staff members shall not invoke their relationship with Portucel Group.
6. Securities trading
Portucel Group staff who are in possession of relevant information, not yet made public, which might potentially influence the listed prices of shares in Portucel, shall not, during the period prior to disclosure of such information, trade securities issued by Group companies, strategic partners or companies involved in transactions or dealings with the Group, not disclose this information to third parties. In particular, estimates of results, decisions on significant acquisitions or partnerships and the winning or loss of important contracts constitute forms of privileged information.
7. Press releases and advertising
7.1. The information released by Portucel Group to the media and those intended for advertising purposes shall: • be issued solely by the units or offices authorized to do so; • comply with the principles of legality, rigour, opportunity, objectivity, veracity and clarity; • safeguard secrecy and confidentiality so as to protect the Group’s interests; • respect the cultural and ethical norms of the community and human dignity; • contribute to an image of consistency which adds to the value and dignity of Portucel Group, promoting its good name in society.
8. Social Responsibility and Sustainable Development
8.1. Portucel Group accepts its social responsibility to the communities in which it carries on its business activities, as a means of contributing to their advancement and well-being.
8.2. The sustainable development of Group companies is regarded as the business contribution to their present and future development through pro-active management of the environmental, social and
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economic impacts of their respective activities, through a permanent commitment to application of best practices.
8.3. Portucel Group companies shall participate and encourage its staff to participate actively in initiatives relating to environmental protection, energy efficiency and efficient resource management, assigning preference to the use of materials produced in accordance with sustainability principles.
8.4. Portucel Group will seek to encourage its staff to take part in socio-cultural activities and to perform voluntary work.
8.5. The staff of Portucel Group companies shall seek to ensure that, in the course of their business, no harm or damage is caused directly or indirectly to the community’s heritage, caring for its external image by showing respect for archaeological, architectural and environmental heritage and improving the quality of life enjoyed by citizens.
8.6. Portucel Group regards sustainable development as a strategic aim for assuring economic growth and contributing to a more developed society, preserving the environment and non-regenerating resources for future generations.
9. Non-compliance
9.1. Failure to comply with the general and mandatory rules of conduct established in this Code of Ethics shall constitute serious misconduct, subject to disciplinary proceedings, notwithstanding any possible civil or criminal liability.
9.2. The Board of Directors shall be notified immediately in writing of any instance of non-compliance which come to light, and shall pronounce on the facts within 30 days of being informed.
9.3. If it is found, initially or whilst the proceedings are pending, that a company officer may be involved, the Board of Directors shall forward the file to the Ethics Committee which shall then proceed accordingly and may, if justified, inform any relevant judicial authority of the facts.
9.4. The personnel assessment system shall include a mandatory reference on the individual appraisal sheet for each staff member of any failure to comply with rules deriving from this Code of Ethics.
9.5. The Ethics Committee shall draw up an annual report on compliance with the rules established in this Code of Ethics, detailing all irregularities of which it is aware, and setting out the conclusions and follow-up proposals adopted in the different cases examined.
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9.6. For the purposes envisaged in the preceding paragraph, the Board of Directors shall notify the Ethics Committee of all relevant facts which come to its attention.
9.7. The Ethics Committee’s Report shall be annexed to the Corporate Governance Report.
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ANNEX II
NOTE ON THE ACTIVITIES OF PORTUCEL’S NON-EXECUTIVE DIRECTORS
All the members of Portucel’s Board of Directors were re-elected at the last Annual General Meeting for the term of office from 2011 to 2014. The existing members have been joined by Dr. José Miguel Pereira Gens Paredes and Dr. Paulo Miguel Garcês Ventura, appointed to non-executive directorships.
All the non-executive directors took part in all the meetings of the Board of Directors, and were copied on all relevant information. Whenever requested from the Executive Board they received diligent and satisfactory explanations or complementary information concerning the company’s day-to-day affairs. The non-executive directors frequently requested detailed information on decisions taken by the Executive Board, in order to assess the performance of the Company’s executive management in the light of annual and longer terms plans and the budgets approved from time to time by the Board of Directors.
On the Chairman’s request, they took part in various meetings of the Executive Board, particularly in those dealing with strategic questions, namely plans for the Group’s expansion and future development.
Executive management decisions were also closely scrutinised at the quarterly meetings, and the non-executive directors were provided with information which enabled them to assess the performance of the Executive Board.
In addition to monitoring day-to-day operating matters, the non-executive directors paid special attention to following through the major capital expenditure projects implemented in recent years.
In his capacity as Chairman of the Board of Directors, Mr. Pedro Queiroz Pereira called and coordinated all the meetings of the board during the financial year of 2011. In the course of his duties he has coordinated, in cooperation with the other directors, the development and strategic options of the Company and the Group to which it belongs.
Also in connection with his capacity as Chairman of the Board of Directors, he held regular meetings with the Chairman of the Executive Board in order to obtain information and appropriate documentation, to keep him informed on the evolving affairs of the company and its subsidiaries.
He was informed in advance of the order of business for each meeting of the Executive Board, and of the resolutions adopted over the course of the year, accompanied by the respective supporting documents. During the year he held a series of informal meetings with the other non-executive directors, in order to assess the performance of the Executive Board.
Consolidated Annual Report 2011 161
As a non-executive member of Portucel’s Board of Directors, Eng. Manuel Maria Gil Mata took part in board meetings and, on the Chairman’s invitation, he also took part in several meetings of the Executive Board,.
In addition to monitoring normal business affairs, he paid special attention to progress on the latest major investment projects underway, such as the modernization of the Biomass Boiler in Cacia and the new Steam Turbogenerator in Figueira da Foz.
As Chairman of the Sustainability Committee, he called quarterly the quarterly meetings of this committee, which he chaired, and coordinated and led the preparatory work on the drafting of the Group’s Sustainability Report for 2010/2011
He continued to make a significant contribution to the work of the Environmental Council, which held its three regular meetings planned for 2011, and took an active part in the search for a new chairman for the council, to replace the former chairman who sadly passed away.
As representative of Portucel’s Directors, he took part in the meetings of the general Council of Celpa, the Portuguese Paper Industry Association.
In addition to monitoring day-to-day operational activities, Eng. Luís Alberto Caldeira Deslandes paid particular attention to progress on the Major Investment Projects at the consolidation phase, such as the Setúbal Paper Mill, following through its evolving production capacity, in terms of efficiency and quality.
As Chairman of Portucel’s Corporate Governance Committee he called and chaired several working meetings held by the committee in the course of 2011, with a total of three formal meetings, following through developments related to corporate governance issues over the year, and in particular with regard to the drafting of the Corporate Governance Report and dealings with the regulatory authority, as well as analyzing the various reports published by the CMVM and monitoring the work of the recently constituted Association of Securities Issuers (AEM).
Dr. Francisco José Melo e Castro Guedes focussed his activities primarily on monitoring the work of the Executive Board, in order to obtain the necessary information on all aspects of Company and Group affairs, and over the course of the year provided his contribution to the executive directors in his specialist fields, both at board meetings and informally. This non-executive director is currently devoting his closest attention to following through the Company’s projects for international expansion, thanks to his considerable expertise in this area, in particular with regard to activities of potential interest in Brazil, due to his experience of the country.
Consolidated Annual Report 2011 162
The directors Dr. José Miguel Pereira Gens Paredes and Dr. Paulo Miguel Garcês Ventura concentrated essentially on monitoring the work of the Executive Board, in order to obtain the necessary information on the affairs of the Company and the Group in all areas, assisting the executive directors over the course of the year on matters in which they have expertise, both at board meetings and informally. These directors followed certain specific areas more closely, and Dr. José Miguel Pereira Gens Paredes has worked primarily on financial matters whilst Dr. Paulo Miguel Garcês Ventura has concentrated on legal issues, where his experience allows him to make the greatest contribution.
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ANNEX III
Report and Opinion of the Audit Board Consolidated Accounts
Financial year of 2011
Shareholders,
1. In accordance with the law, the articles of association and the terms of our mandate, we are pleased to submit the report on our supervisory activities in 2011 and to issue our opinion on the Consolidated Management Report and Consolidated Financial Statements presented by the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, SA, for the financial year ended 31 December 2011.
2. Over the course of the year we monitored the affairs of the company and its most significant affiliates and associates, with the regularity and to the extent we deemed appropriate, through periodic meetings with the company’s directors and senior management. We checked that the accounts were kept correctly and duly documented, and verified the effectiveness of the risks management, internal control and internal audit systems. We also monitored compliance with the law and the articles of association. We encountered no constraints in the course of our supervisory activities.
3. We met several times with the official auditor and external auditor, PricewaterhouseCoopers & Associados, SROC, Lda, monitoring its auditing activities and checking its independence. We assessed the Legal Accounts Certificate and the Audit Report, and are in agreement with the Legal Accounts Certificate presented.
4. In the course of our work we found that:
a) the Consolidated Income Statement, the Consolidated Statement of Recognized Income and Expense, the Statement of Changes in Consolidated Equity and the Consolidated Statement of Cash Flows and the corresponding Notes provide an adequate picture of the state of the company’s affairs and its profits;
b) the accounting policies and valuation criteria adopted comply with the International Financial Reporting Standards (IFRS) as adopted in the European Union and suitably assure that such criteria lead to a correct valuation of the company’s assets and profits, taking due account of the analyses and recommendations of the external auditor;
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c) the Consolidated Management Report provides a sufficient description of the business affairs of the company and its affiliates included in the consolidated accounts, offering a clear account of the most significant developments during the year.
d) the Corporate Governance Report includes the information required by Article 245-A of the Securities Code.
5. Accordingly, taking into consideration the information received from the Board of Directors and the company departments, and also the conclusions of the Legal Accounts Certificate and the Audit Report, we recommend that:
a) the Consolidated Management Report be approved;
b) the Consolidated Financial Statements be approved;
6. Finally, the members of the Audit Board wish to acknowledge and express their thanks for the assistance received from the Board of Directors, the senior managers of the company and other staff.
Lisbon, 29 February 2012
The Chairman of the Audit Board
Miguel Camargo de Sousa Eiró
Member
Duarte Nuno d’Orey da Cunha
Member
Gonçalo Nuno Palha Gaio Picão Caldeira
Consolidated Annual Report 2011 165
ANNEX IV
STATEMENT ON THE REMUNERATION POLICY FOR THE MEMBERS OF PORTUCEL’S MANAGEMENT AND SUPERVISORY BODIES TH FOR SUBMISSION TO THE GENERAL MEETING OF SHAREHOLDERS OF APRIL 10 2012
I. Introduction
Portucel’s Remuneration Committee drew up a remuneration policy statement for the first time in 2008, successfully submitting it for approval by the company’s general meeting that year. This statement was drafted in line with a recommendation issued on this matter by the Securities Market Commission (Comissão de Mercado de Valores Mobiliários).
The Remuneration Committee declared at this time that it felt that the options set out in the statement should be maintained until the end of the term of office of the company’s officers then underway. This term ran from 2007 to 2010.
It was then necessary to review the statement in 2010 in the light of the provisions of Law 28/2009, of 19 June, requiring the Remuneration Committee to submit a remuneration policy statement each year to the General Meeting.
It remains the view of this Committee that, as a set of principles, the remuneration policy statement should be kept stable throughout the term of office of the company officers, unless exceptional or unforeseen circumstances require a change. Moreover, given that the Remuneration Committee has been re-elected for another term of office, running until 2014, it continues to make sense that this stability be maintained, except in the possible case of the circumstances mentioned, which have not so far occurred.
We have therefore opted to proposal for approval a statement with the same content as that currently in force.
There is a significant divide between the two most common systems for setting the remuneration of company officers. The first is for such remuneration to be set by the general meeting; this solution is rarely adopted, being rather impractical for a variety of reasons. The second is for remuneration to be set by a Committee, which decides in keeping with criteria on which the shareholders have not had the opportunity to pronounce.
The solution now before us amounts to an intermediate system whereby the shareholders can appraise a remuneration policy to be followed by the Committee. This seeks to draw on the best features of both theoretical systems, as we propose to do in this document, reasserting the position we have previously defended whilst also including the contribution from the additional experience and expertise acquired by the company, and complying with the new legal requirements in this field as referred to above.
II. Legal requirements and recommendations
This statement is issued in the legal framework formed by Law 28/2009, of 19 June (as referred to above), and the recommendations of the Securities Market Commission set out in the Corporate Governance Code issued by the Commission.
In addition to rules on the frequency with which the statement must be issued and approved and on disclosure of its content, this law also stipulates that this content should include information on:
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a) Arrangements for aligning the interests of members of the management body with those of the company;
b) Criteria for setting the variable component of remuneration;
c) The existence of share or share option pay schemes for members of the management and supervisory bodies;
d) The possibility of the variable component of remuneration, if any, being paid, wholly or in part, after the accounts have been finalized for the entire term of office;
e) Rules limiting variable limitation in the event of the company’s results revealing significant deterioration in the company’s performance in the last period for which accounts are closed or when such deterioration may be expected in the period underway.
The current recommendations of the Securities Market Commission make the following requirements:
II.1.5.2. In addition to the content referred to in Article 2 of Law 28/2009, of 19 June, the statement on remuneration policy for the management and supervisory bodies referred to in the same article should contain sufficient information on: i) which corporate groups were chosen for the purposes of comparing remuneration policies and practices with a view to setting remuneration; ii) severance pay for directors.
II.1.5.3. The remuneration policy statement referred to in Article 2 of Law 28/2009 should also cover the pay of management personnel as defined by Article 248-B.3 of the Securities Code, when such pay includes a significant variable component. The statement should be detailed and the policy presented should take into account, namely, the company’s long term performance, compliance with the rules applicable to the company’s business activities and restraint in risk-taking.
III. Rules deriving from law and the articles of association
Any remuneration system must inevitably take into account both the general legal rules and the particular rules established in the articles of association, if any.
The legal rules for the directors are basically established in Article 399 of the Companies Code, from which it follows that:
• Powers to fix the remuneration lie with the general meeting of shareholders of a committee appointed by the same.
• The remuneration is to be fixed in accordance with the duties performed and the company’s state of affairs.
• Remuneration may be fixed, or may consist in part of a percentage of the profits for the period, but the maximum percentage to be allocated to the directors must be authorized by a clause in the articles of association, and shall not apply to distribution of reserves or any part of the profits for the period which could not, under the law, be distributed to shareholders.
For the Audit Board and the officers of the General Meeting, the law states that the remuneration shall consist of a fixed amount, determined in the same way by the general meeting, or by a committee appointed by the same, in accordance with the duties performed and the company’s state of affairs.
For the members of the Audit Board and the officers of the General Meeting, the law lays down that the remuneration shall consist of a fixed sum, which shall be determined in the same way by the general meeting of shareholders or by a committee appointed by the same, taking into account the duties performed and the state of the company’s affairs.
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A specific clause in Portucel’s articles of association (article no. 21) provides that the remuneration of directors may be differentiated. The second paragraph of this clause lays down that the General Meeting may issue rules on pension plans and complementary pension schemes for directors.
This is the formal framework to be observed in defining remuneration policy.
IV. Historical background
From the company’s transformation into a limited liability company in 1991 and through to 2004, the remuneration of all of Portucel’s directors consisted of a fixed component, payable fourteen times a year, and set by a Remuneration Committee, and of a variable component, determined annually, depending on the specific circumstances, by decision of the State, as shareholder.
After the first phase of privatization in 2004, the formal principle was first instituted of remuneration being divided into fixed and variable components, the latter being based on the company’s results and the specific performance of each director.
This procedure has been repeated annually since 2004, with directors receiving fixed remuneration and also a variable component.
Since the incorporation of the company, members of the Audit Board have received fixed monthly remuneration. In the case of the officers of the General Meeting, since remuneration for these officers was first instituted it has been set on the basis of the number of meetings actually held.
V. General Principles
The general principles to be observed when setting the remuneration of the company officers are essentially those which in very general terms derive from the law: on the one hand, the duties performed and on the other the state of the company’s affairs. If we add to these the general market terms for similar situations, we find that these appear to be the three main general principles:
a) Duties performed.
It is necessary to consider the duties performed by each company officer not only in the formal sense, but also in the broader sense of the work carried out and the associated responsibilities. Not all the executive directors are in the same position, and the same is also true, for example, of the members of the audit board. Duties have to be assessed in the broadest sense, taking into account criteria as varied as, for example, responsibility, time dedicated, or the added value to the company resulting from a given type of intervention or representation of a given institution.
The fact that time is spent by the officer on duties in other controlled companies also cannot be taken out of the equation, due, on the one hand, to the added responsibility this represents, and, on the other hand, to the existence of another source of income.
It should be noted that Portucel’s experience has shown that the directors of this company, contrary to what is often observed in other companies of the same time, cannot be neatly split into executive and non-executive. There are a number of directors with delegated powers and who are generally referred to as executive directors, but some of directors without delegated powers are closely involved in the life of the company in a variety of ways. These are essential aspects which must inevitably be considered when setting remuneration.
b) The state of the company’s affairs.
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This criterion must also be understood and interpreted with care. The size of the company and the inevitable complexity of the associated management responsibilities, is clearly one of the relevant aspects of the state of affairs, understood in the broadest sense. There are implications here for the need to remunerate a responsibility which is greater in larger companies with complex business models and for the capacity to remunerate management duties appropriately.
d) Market criteria.
It is unavoidably necessary to match supply to demand when setting any level of pay, and the officers of a corporation are no exception. Only respect for market practices makes it possible to keep professionals of a calibre required for the complexity of the duties performed and the responsibilities shouldered, thereby assuring not only their own interests but essentially those of the company, and the generation of value of all its shareholders. In the case of Portucel, in view of its characteristics and size, the market criteria to be considered are those prevailing internationally, as well as those to be observed in Portugal.
VI. Compliance with legal requirements and recommendations
Having described the historical background and the general principles adopted, we shall now consider the issue of compliance by these principles with the relevant legal requirements.
1. Article 2 a) of Law 28/2009. Alignment of interests.
The first requirement that Law 28/2009 regards as essential in terms of the information in this statement is for a description of the procedures which assure that the directors’ interests are aligned with those of the company.
We believe that the remuneration system adopted in Portucel is successful in assuring such alignment. Firstly, because the remuneration sets out to be fair and equitable in the light of the principles set out, and secondly because it links the directors to results by means of a variable remuneration component which is set primarily in the light of these results.
2. Article 2 b) of Law 28/2009. Criteria for the variable component.
The second requirement established by the law is for information on the criteria used to determined the variable component.
The company’s results are the most important factor in setting the variable remuneration: not the results seen as an absolute value, but as viewed from a critical perspective in the light of what may be expected of a company of this size and characteristics, and in view of the actual market conditions.
In setting the variable component, other factors are also considered, resulting in the main from the general principles - market, specific duties, the state of the company’s affairs. These factors are often more individual, relating to the specific position and performance of each director.
3. Article 2 c) of Law 28/2009. Share or option plans.
The decision whether or not to provide share or option plans is structural in nature. The existence of such a plan is not a simple add-on to an existing remuneration system, but rather an underlying to change to the existing system, at least in terms of the variable remuneration.
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Although a remuneration system of this type is not incompatible with the company’s articles of association, we feel that the wording of the relevant provisions in the articles and the historical background to the existing system argue in favour of maintaining a remuneration system without any share or option component.
This is not to say that we see no merits in including a share or option component in directors’ remuneration, nor that we would not be receptive to restructuring directors’ remuneration to incorporate such a plan. However, such a component is not essential in order to promote the principles we defend and, as we have said, we do not believe that this was the fundamental intention of the company’s shareholders.
4. Article 2 d) of Law 28/2009. Date of payment of variable remuneration.
Specialists in this field have draw attention to significant advantages in deferring payment of the variable component of remuneration to a date when the entire period corresponding to the term of office can in some way be appraised.
We accept this principle as theoretically sound, but it appears to us to offer few advantages in the specific case of Portucel and other similar companies.
One of the main arguments supporting this system is that directors should be committed to achieving sustainable medium-term results, and that the remuneration system should support this, avoiding a situation where remuneration is pegged simply to one financial year, which may not be representative, and which may present higher profits at the cost of worse results in subsequent years.
However, whilst this danger is real and is worth safeguarding against by means of systems such as this in companies where the capital is completely dispersed and the directors may be tempted to take a short term view, maximizing quick results by sacrificing long term potential, this does not correspond to the situation in a company such as Portucel, with a stable shareholder structure and management, where these concerns are inherently less of an issue.
5. Article 2 e) of Law 28/2009. Procedures for capping variable remuneration.
Procedures of this kind are designed to limit variable remuneration in the event of the results showing a significant deterioration in the company’s performance in the last reporting period or when such a deterioration may be expected in the period underway.
This type of provision also reflects a concern that good performance in the short term, which may boost directors’ remuneration, could be achieved at the cost of future performance.
For obvious reasons, the arguments presented above also apply here. It should also be noted that a system of this kind would have little practical effect if not combined with significant deferral of remuneration, which is not proposed for Portucel.
6. First part of Recommendation II.1.5.2.. Comparative information.
In relation to groups of companies whose remuneration policies and practices have been taken as the baseline for setting remuneration, this Committee took into consideration, to the extent of the information accessible, all Portuguese companies of equivalent size, namely PSI-20 companies, and also companies in international markets with characteristics similar to those of Portucel.
7. Second part of Recommendation II.1.5.2.. Termination and severance pay.
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There are no agreements, and no such provisions have been defined by this Committee, on payments by Portucel relating to dismissal or termination by agreement of Directors’ duties.
8. Recommendation II.1.5.3. Inclusion of managers in this statement.
The Remuneration Committee has no proposal or statement to make on this issue, as it is the express understanding of the Board of Directors that it has sole powers over this matter and that it is not in the company’s interest to comply with this recommendation.
VII. Specific Options
The specific options for the remuneration policy we propose are as follows:
1. The remuneration of executive directors shall comprise a fixed component and a variable component.
2. The remuneration of non-executive directors shall comprise only a fixed component, or else a fixed component and a variable component, as for executive directors, whenever justified by the nature of the duties actually exercised and their degree of responsibility and involvement in the day to day running of the company.
3. The remuneration of the members of the Audit Board and the officers of the General Meeting shall comprise a fixed component only.
4. The fixed component of the remuneration of directors shall consist of a monthly amount payable fourteen times a year or of a pre-set amount for each meeting of the Board of Directors attended.
5. A monthly rate shall be set for the fixed component of the remuneration of directors for all those who are members of the Executive Board and those who, although not members of such Board, perform duties or carry out specific work of a repeated or ongoing nature.
6. The pre-set amount for participation in members of the Board of Directors shall be fixed for those who have duties which are essentially advisory and supervisory.
7. The fixed remuneration of the members of the Audit Board shall consist in all cases of a pre-set amount paid fourteen times a year.
8. The fixed remuneration of the officers of the General Meeting shall consist in all cases of a pre-set amount for each meeting, the remuneration for second and subsequent meetings being lower than that for the first general meeting of the year.
9. In setting all remuneration, including in particular the distribution of the total amount allocated to the variable remuneration of the Board of Directors, the general principles established above shall be observed: the duties performed, the state of the company’s affairs and market criteria.
The Remuneration Committee
Chairman: Egon Zehnder, represented by José Gonçalo Maury Member: Frederico José da Cunha Mendonça e Meneses Member: João Rodrigo Appleton Moreira Rato
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ANNEX V
Report of the Ethics Committee on its work during the period ended 31 December 2011
During the period ended 31 December 2011, the Ethics Committee took cognizance of the resolution of the Board of Directors of Portucel – Empresa Produtora de Pasta e Papel, S.A., adopted at the meeting of 26 October 2011, substituting the former director Dr. Miguel Ventura by Dr. Rui Gouveia.
In the course of the year, no question falling within the scope of the Committee’s responsibilities, which it would be required to assess, was submitted for its scrutiny, and no issue was put to the Committee, for its opinion or recommendation, by any of the company’s governing bodies, employees, customers or other stakeholders.
The Committee can only express its satisfaction that the company’s governing bodies have functioned properly and issues this report as required and for the purposes of the provisions of Article 2 a) of the Rules of Procedure of the Ethics Committee.
Lisbon, 24 February 2012
The Chairman of the Ethics Committee
Júlio de Lemos de Castro Caldas
The Members
Rita Maria Lago do Amaral Cabral
Rui Gouveia
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